QRM Rule Proposal Could Negate Any Real Market Change
What was originally designed to revolutionize the mortgage industry and make lenders more accountable, is now basically a law in name only. The Dodd-Frank Act of 2010 was intended to prevent lenders from making risky loans again like the ones that led to the housing collapse, but as of the latest week, a key provision has been erased.
Last week, six federal regulatory agencies, including the Federal Reserve, proposed a change to the Dodd-Frank "qualified residential mortgages" (QRMs) law requirements. The law called for banks to hold onto at least five percent of any loan that does not come with a 20 percent down payment. This was to make sure lenders had "skin in the game" when they designed their loans, instead of being able to sell them off completely to investors.
Only those loans with full down payments - QRMs - would be deemed safe enough to totally off-load to the secondary market and would be exempt from the five-percent rule. Regulators believed that borrowers who put down 20 percent or more would be highly unlikely to default because they had so much to lose. Yet after facing two years of fierce opposition from both banks and consumer advocacy groups – who say it will cripple the housing industry - regulators want to change the definition of a QRM to include any fixed rate loan with documented borrower income and debt loads of less than 43 percent of total income. There would be no down payment requirement.
"Our goal as regulators is to provide clear rules that allow for robust markets that meet the needs of creditworthy borrowers in a safe and sound manner," said Paul M. Nash, a senior official at the Office of the Comptroller of the Currency. "I believe the rule, as reproposed today, helps accomplish just that. "
Yet while the new proposed QRM definition would help creditworthy borrowers continue to buy homes, it does nothing to prevent lenders from making crazy loans again in the future. The whole point was to make borrowers and lenders more accountable in the mortgage process, but as the proposed rule stands, nothing will change.
Banks had worried that holding on to a portion of most loans would severely limit their available lending funds and consumer advocacy groups worried that the costs would get past on to the buyers. They said it would also be much harder for buyers to break into the housing market without 20 percent down payments.
And those concerns were valid and were likely to occur if the original QRM rule held, but the risk to taxpayers of another housing market bailout would have radically declined. To date, the mortgage meltdown has cost taxpayers billions of dollars. With the proposed new rule, the eternal battle between the opposites of freedom and safety marches on.