What’s the big deal about the Qualified Residential Mortgage anyway?

If you haven’t yet heard of the Qualified Residential Mortgage (QRM), you will soon. The QRM is one of the exemptions listed in SEC. 941 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (signed into law last year), which allows securitizers of residential mortgages to bypass the credit risk retention rule.

Securitizing is basically the grouping of mortgages into a security instrument (such as collateralized debt obligations or real estate mortgage investment conduit) and selling it on the secondary market. Mortgage securitization has had a long history in this country, and has impacted the housing market by creating various forms of mortgages and allowing many Americans to become home owners. However, if you recall, mortgage securitization was widely criticized as being one of the causes of the recent housing crash. The Dodd-Frank Wall Street Reform and Consumer Protection Act was enacted, in part, to address mortgage securitization practices.

SEC. 941 “Regulation Of Credit Risk Retention” of the “Act” requires a securitizer of residential mortgages to have skin in the game by retaining some of the risk of any asset or mortgage backed security that is sold, transferred, or conveyed. Additionally, the securitizer is prohibited from hedging or transferring their credit risk. Exceptions to this section include federal programs insuring or guaranteeing mortgages; which includes FHA and VA mortgages, as well as mortgages from institutions supervised by the Farm Credit Administration (including the Federal Agricultural Mortgage Corporation). However, Fannie Mae and Freddie Mac are not exempt.

An additional exception to SEC. 941, which would allow mortgage securitizers to bypass the risk retention rule, is the QRM. Although QRM rules have not yet been finalized, the rules have been proposed by government regulators- and yes, there has been a responsive uproar by many in the housing industry.

Proposed QRM rules include stringent credit score and debt-to-income ratio requirements, and a 20% down payment. The response by housing industry proponents has included press releases, letters, and numerous commentaries suggesting that if the proposed QRM rules are adopted, an already fragile housing market may experience further setbacks. It has been argued that rather than lowering mortgage interest rates and costs, many credit-worthy home buyers who do not have a 20% down payment will be forced to pay more for a mortgage or they may choose renting as an alternative to buying.

As proponents and critics of the QRM argue their perspectives, some could point to an opportunity to address mortgage securitization practices much earlier when the House of Representatives held hearings on predatory lending. In November 2003, the House Subcommittee on Housing and Community Opportunity and the Subcommittee on Financial Institutions and Consumer Credit held the “Hearing on Protecting Homeowners: Preventing Abusive Lending While Preserving Access to Credit.” Testimony provided discussed mortgage securitization and its role in an expanding credit market (specifically the subprime mortgage market), as well as the discussion of eliminating “unscrupulous” lending practices.

Regardless of higher down payments and stringent credit requirements of the QRM, the debate is only a sideline of the overall reform in housing and finance. As final rules and regulations are decided and put into place next year, the housing market as we know it could be vastly changed; but then again, the housing market might just continue along its current path seeking equilibrium.

by Dan Krell © 2011

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