The QRM 20% Down Payment Rule... a 'proposed' lending concern that everyone needs to be aware of.
The Dodd-Frank Act, which became law on July 2010, requires financial institutions (lenders) that securitize mortgages loans to retain at least 5% of the credit risk. The Act, however, exempts from the risk-retention requirement securities backed exclusively by Qualified Residential Mortgages (QRMs) – in particular, mortgages with underwriting and product features that are expected to result in a lower risk of default.
To accomplish this task Federal regulators under the proposed ‘QRM Rule’ are trying to put in place a 20% down payment requirement for mortgage loans. For barrowers who don’t meet the 20% threshold, their loan would be considered more risky and would be expected to pay a hefty premium [estimated at 50 to 100 basis points higher] for a loan in the private (commercial loan) market to offset the increased risk to lenders.
FHA loans are exempt from the QRM (conventional loan) requirements. However, the consequence of this change would cause concern for over-exposing FHA.
A change such as this would have dramatic impact on the number of buyers capable of qualifying for a home loan and legislation such as this would without question pro-long our already struggling economy/housing market. As the diagram shows, it would take the average buyer a significant number of years to save enough for a 20% down payrment requirement.
As can be expected, there has been a lot of opposition to this rule. Banking regulators’ proposing the QRM rule have gotten consumer groups, mortgage insurers, real estate professionals, and a good portion of the lending industry up in arms over the rule’s 20-percent down payment requirement (and other standards).
The proposed QRM rule would create an enormous down-payment requirement and reduce the availability of affordable mortgages for qualified consumers. Few borrowers would be able to meet these requirements and those that do would be forced to pay much higher rates and fees for the safe loans that did not meet the exceedingly narrow QRM criteria.
To get a good picture of what regulators are proposing view Ability to Repay Qualified Mortgage Rule: How it Works (a seven minute video presented by Jeff Lischer, managing director of regulatory policy for NAR).
For additional insight on this topic, go to Learn About the Latest on the Proposed QRM Rule
Also reference Coalition for Sensible Housing Policy submitted to Federal Regulators on July 11th, 2011.
