Washington Needs to ‘Get it Right’ on QM and QRM

A bright line might make 2012 MBA chair Michael Young very happy. Photo: Brooks Kraft.

As Michael Young prepares to depart as the 2011-2012 chairman of the Mortgage Bankers Association he has two items at the top of his Washington wish list: that regulators “get it right” on both the qualified mortgage and qualified residential mortgage rules.

If they don’t, he said, “the financial exposure” to rank and file mortgage bankers could be extremely damaging.

A residential finance professional for six decades (that’s not a misprint), Young fears that regulators, in their haste to make the residential finance market ultra-safe for consumers will hurt the business so much that new capital might avoid entering.

“We have to begin to create rules that are fair to the homebuyer but also encourage participation in the lending market,” he told National Mortgage News during a recent exit interview.

Most importantly, he said, lenders need to have a clear understanding of what their cost expectations might be.

As any mortgage professional knows, QM stands for qualified mortgage with similarly sounding QRM being shorthand for qualified residential mortgage.

As the name suggests, the QRM rule—which has yet to be finalized—will determine which single-family loans are exempt from risk retention. Securitizers must retain 5% of the credit risk on loans that are not exempt.

Six different regulatory agencies have been working on the QRM rule for over a year. (The Dodd-Frank Act exempted Fannie Mae, Freddie Mac and Federal Housing Administration loans from risk retention.)

The final QM rule will not be the product of multiple regulators. Instead, it’s in the hands of the Consumer Financial Protection Bureau, which is still sifting through comment letters from the industry. The debate is already red hot over the legal protections lenders should be given to shield them from borrower lawsuits.

As might be expected, the legal protections are key to mortgage bankers of all different stripes—depositories and nonbanks alike. Some trade groups are advancing a “bright line” proposal that starts with 43% debt-to-income ratio and features a “waterfall” of compensating factors (liquid reserves, payment history and so on).

The MBA views the 43% DTI as too low and the trade group considers the rebuttable presumption part of the rule to be a “fatal flaw” in the waterfall. “Any waterfall should be embedded in a safe harbor if this approach is adopted by the CFPB,” MBA chairman-elect Debra Still told a congressional subcommittee this fall.

Young worries that if there is no bright-line test, lenders just won’t make the loans.

Besides serving in his annual post as MBA chairman, Young is also chairman of Cenlar FSB of Ewing, N.J., which holds a thrift charter but is actually a specialty servicer for depositories, nonbanks, REITs and other housing finance providers throughout the nation.

Among subservicers, the privately held Cenlar ranks first in the U.S. with roughly $100 billion of contracts on its books. (Young owns a stake in the firm.)

“Servicing is done best in a scale operation,” he said.

Year-over-year its business has grown by an admirable 25%. In particular, the Cenlar chairman is bullish about the firm’s prospects and that of subservicers in general. “I think there’s a bright future as far as an expanding market is concerned,” he said, noting that the “risk-reward” for small servicers just isn’t there. In other words, smaller firms will use a subservicer if they want to keep the rights but can’t afford to build a system themselves.

MBA, Young noted, has spent a fair amount of time on servicing issues the past few years. “I would say that servicing now occupies a healthy proportion of the management focus of MBA,” he said.

When asked if MBA was happy with the robo-signing settlement the nation’s megabanks signed with the attorneys general, he hesitated. (MBA was not a party to the agreement, though some of its members were.) “It was constructive in the end,” he said.