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Category Archives: Mortgage News

Qualified Residential Mortgage Guidelines | Required 20% Down Payment Feared

June 9, 2011 · Source: MortgageNewsDaily.com
What you need to know about: QRM, Qualified Residential Mortgage Guidelines.
In case you didn’t know it, this time next year (unless something changes) getting a mortgage will be even MORE challenging. Don’t know about the new Qualified Residential Mortgage guidelines..? Its time to learn:

The proposed regulations governing the Qualified Residential Mortgage (QRM) exemption from risk retention rules constitute a “devastating, unnecessary and very expensive wrench (thrown) into the American dream”according to a white paper released Wednesday by a consortium of housing industry groups. The paper was published in advance of a scheduled hearing of the House Subcommittee on Capital Markets and Government Sponsored Enterprises on “Understanding the Implications and Consequences of the Proposed Rule on Risk Retention”.  Two of the groups in the consortium, the Mortgage Bankers Association and the Center for Responsible Lending addressed the committee along with other trade groups and a panel of representatives of the regulatory agencies which drafted the regulations.

….and yes, required down payments will rise to..20% (just what the market needs now, great thinking fellas!)

The White Paper takes particular exception to the 20 percent down payment requirement.   Based on 2009 home price and income data it says it would take 15 years for an average family to save the $43,000 down payment on a median priced home compared to only six years to save 5 percent to put down on the same house. This requirement, it says, would deny millions of responsible borrowers any access to the lowest rate loans with the safest loan features.

..more fun, the new QRM Guidelines will also make it so millions of owners who would of been able to refinance will be locked into their current higher rates. Agents, tell ALL your clients to re-fi now.

The down payment requirement will also present a sizeable bar to homeowners hoping to refinance.  Based on data from CoreLogic, the paper estimates that nearly 25 million existing homeowners lack sufficient equity in their home to meet the 80 percent loan-to-value requirement.  Even at 90 percent LTV, 34 percent or over 16 million homeowners could not refinance into qualifying mortgages.

Analysis of CoreLogic data on loans originated between 2002 and 2008, a period which includes the loans that recently defaulted at record rates, shows that raising down payments in 5 percent increments had only a negligible impact on default rates but significantly reduced the pool of borrowers that would be eligible for QRM loans.   For example, where borrowers already met strong underwriting and product standards, moving from a 5 percent to a 10 percent down payment reduced the default rate by only 0.2 to 0.3 percent but reduced the pool of eligible borrowers by 7 to 15 percent.  Jumping the down payment from 5 to 20 percent changed the default rate by 8/10ths of a percent while knocking out 17 to 28 percent of borrowers depending on the year of the loan.

Translated, conventional wisdom that owners would be less likely to default if they have “more skin in the game” in the form of a higher downpayment pay be…wrong.

Removing so many potential buyers from the pool of borrowers eligible for qualified mortgages “could frustrate efforts to stabilize the housing market,” the report says, and to date the regulators have not put a price on the cost of risk retention to the consumer.  “This should be done before finalizing a rule that imposes 5 percent risk retention across such a broad segment of the market.”  A JP Morgan Securities Inc. estimate put the cost of 5 percent risk retention at a three-percentage point rise in interest rates for loans funded through securitization.  While that estimate may be high, the report says, even a one percentage point increase in interest rates could be devastating to a fragile housing market. The National Association of Home Builders (NAHB), another member of the consortium, estimates that every percentage point increase in interest rates means that 4 million households would no longer qualify for a median priced home.  Any QRM-related costs, the report points out, would be in addition to a general interest rate increase anticipated over the next 12 to 18 months.

Any of these effects will carry greater impact in those states that have already been hardest hit by the housing downturn.  For example, in the five states that have seen the most foreclosures and greatest price decreases (Nevada, Arizona, Georgia, Florida, Michigan) between 59 and 80 percent of homeowners do not have 20 percent equity in their homes.  Six out of ten homeowners would not be able to move and put 20 percent down on their next home.

…think about this that last paragraph for a moment. In many parts of the US home owners who CAN sell are selling at a loss either by taking the hit personally (writing a check at closing or just losing their equity )or a short sale (or foreclosure). With the new QRM Guidelines most of these buyers will be required to put down 20% before they can buy again. If you live in Average Town, USA and want to buy an average house for…$200,000…you will be required to come up with a $40,000 downpayment. How long will it take for someone to save that kind of money? 10-15 years is the answer. Again, great thinking fellas in Washington D.C….this QRM thing is just the perfect fix to this housing mess! Keep up the great work!

These borrowers, the paper says, have already put significant “skin in the game” through down payments and years of timely mortgage payments, “but the proposed QRM definition tells them they are not ‘gold standard’ borrowers and they will have to pay more.”

With major regional housing markets ineligible for lower cost QRMs many states and metro areas that have seen the biggest price declines will now face higher interest rates, reduced investor liquidity, and fewer originators able or willing to compete for their business.  “These areas face long-term consignment to the non-QRM segment of the market.”

..so, the hardest hit markets in the US will be adversely effected the most from the QRM Guidelines.

The paper concludes that the proposed rules will also negatively impact the private lending market.  The vast majority of loans will be non-QRMs subject to the higher costs of risk retention and without regulations that mandate sound underwriting standards.  The statutory exemption for FHA and VA loans will give them a significant market advantage over fully private loans. This will delay or even halt the return of private capital into the market.

….Translated: FHA and VA lending programs will grow larger. Remember, the loan limits are DROPPING across the US. SO, those of you who sell in areas where the average sales price is over the FHA loan limits….better tell your buyers that they will be needing to save a few more nickels.

While the inclusion of GSE loans mitigates the immediate adverse impact of the rule on the housing market, it is not a viable long-term solution and does little to establish the certainty the secondary market needs.  “Rather than rely solely on a short-term fix the regulators should follow Congressional intent and establish a broadly available QRM that will create incentives for responsible liquidity that will flow to a broad and deep market for creditworthy borrowers.”

Risk-retention is not a viable option for smaller institutions and will reduce the ability of community-based lenders to compete in the mortgage market.  The top three-FDIC insured banks already control 55 percent of the single-family mortgage market and this consolidation will only intensify.  “In short, the proposal creates real systemic risk while doing little to relieve it.”

Congress intended QRM to provide creditworthy borrowers access to well underwritten products, provide a framework for responsible private capital to support housing recovery and to shrink government presence in the market while restoring competition and mitigate the potential for further consolidation.  Instead the proposed rule is so narrow that it will force a majority of both homebuyers and homeowners to either forego purchasing/refinancing or pay higher rates, and will hamper competition and accelerate consolidation in the market.

In addition to MBA, NAHB, and the Center for Responsible Lending, the members of the consortium are Community Mortgage Banking Project, the Mortgage Insurance Companies of America, and the National Association of Realtors®.

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