Six federal agencies are proposing a national Qualified Residential Mortgage (QRM) standard that would require a minimum 20 percent downpayment, which would keep homeownership out of reach of most first-time home buyers and middle-class households.
In addition, the QRM plan includes several other bad ideas that would seriously impact the average family’s ability to affordably obtain a home of their own. It would mandate restrictive debt-to-income ratios to qualify for a home loan and prevent 25 million current home owners from refinancing to lower mortgage rates because they lack the required 20 percent equity in their homes.
High downpayment and equity rules along with excessive underwriting requirements will not have a meaningful impact on default rates, but it will tighten lending rules to the point where millions of creditworthy home buyers won’t be able to qualify for a mortgage. Responsible consumers who maintain good credit and seek safe loan products will be forced into more expensive mortgages under the terms of the proposed rule simply because they do not have 20 percent or more in downpayment or equity. In other words, the proposal unfortunately penalizes qualified, low-risk borrowers.
A 2012 study by the UNC Center for Community Capital and the Center for Responsible Lending found that the proposed rule could push as many as 60 percent of creditworthy borrowers into high-cost loans or entirely out of the market. The study also found that the provisions of the Dodd-Frank financial reform legislation that ban loans with the highest risk, such as those with prepayment penalties or no requirement to document the buyer’s income, would adequately address the bad underwriting at the root of the housing crisis.
NAHB estimates that it would take 12 years for a typical family to save enough money for a 20 percent downpayment on a median-priced single-family home and other research has found it would take even longer. Borrowers unable to make a 20 percent downpayment or to obtain FHA financing would be expected to pay a premium of up to two percentage points for a loan in the private market to offset the increased risk to lenders, according to NAHB economists. This would annually disqualify about five million potential home buyers, resulting in 250,000 fewer home purchases each year.
If buyers are denied access to affordable housing credit, a housing recovery will not take hold and economic growth will stall.
Low-downpayment home loans have been originated safely for decades and did not cause the housing lending crisis. Subprime, no-documentation loans and other alternative mortgage products crashed the economy. The Administration and regulators must acknowledge this fact and offer a new plan that ensures a safe and healthy mortgage market and keeps homeownership affordable for working American families.
Proposed “Qualified Mortgage” Requirements Will Define the Market
Another provision of the Dodd-Frank legislation could also have a profound effect on mortgage requirements.
The Consumer Financial Protection Bureau (CFPB) on Jan. 10, 2013 issued its rules on a qualified mortgage (QM) standard. The qualified mortgage rule stipulates that borrowers must be able to repay home loans issued to them and will set the parameters for all mortgage financing going forward. So it is essential that it strikes the proper balance that encourages lenders to provide creditworthy borrowers access to affordable home loans, and also gives assurances to financial institutions that they will be protected from lawsuits if they meet the criteria set forth in the rules.
NAHB believes that the final rule generally achieves this balanced approach and is workable for both industry stakeholders and consumer groups. NAHB is encouraged that the CFPB heeded concerns from the housing industry to craft a broad standard that includes many of today’s sound mortgage products, including fixed-rate and adjustable-rate mortgages, under the QM standard.
The rule will take effect next January. To spur the revival of the home lending market, it is essential that regulators act prudently and thoughtfully in the coming year to implement this rule in a sensible manner to avoid disruptions to the housing finance system and ensure qualified borrowers can obtain affordable credit.
What’s the Difference Between a “Qualified Mortgage” and a “Qualified Residential Mortgage”?
Although the terms sound similar, they refer to different aspects of a mortgage and the financial system.
The term “qualified mortgage,” or QM, refers to all mortgages that will be available to consumers. It sets a specific standard for consumer loans; mortgages not meeting that standard could be considered predatory.
A “qualified residential mortgage,” or QRM, is one that can be sold by the lender on the secondary mortgage market. Lenders are not required to sell mortgages on the secondary market. However, many lenders prefer to sell mortgages quickly in order to replenish their funds so they can continue to make loans in their community, and the vast majority of mortgages are sold on the secondary market. For this reason, the QRM could quickly become the market standard.
Information and resources related to the proposed QRM requirements:
- Summary of “Balancing risk and access: Underwriting standards for qualified residential mortgages.” Read the full report. (UNC and Center for Responsible Lending).
- Industry white paper on QRMs
- Consumer, banking and housing groups issue joint statement on proposed QRM rules
- Diverse groups respond to proposed rule for QRMs
- NAHB press release on how 20 percent downpayment rule would disrupt housing market
- NAHB credit risk retention letter to joint regulators
Information related to the proposed QM requirements:
- Official NAHB statement on QM rule
- NAHB testimony before the House Financial Services Subcommittee on Financial Institutions and Consumer Credit
- Housing finance reform must provide reliable credit to home buyers, NAHB tells Congress
- Public comment letter to Federal Reserve on QM regulations