Qualified Residential Mortgage, known as QRM, is a new type of low-risk mortgage with anticipated lower interest rates. Sounds benign enough, right? But, let’s look a little closer… it’s the details that make the difference and, fortunately, QRM is finally arousing the fear and respect it deserves. So, how do you really define QRM and what’s it for?
The Dodd–Frank Wall Street Reform and Consumer Protection Act signed into law about a year ago required lenders to retain a portion of the risk of the loans they sell to investors, unless the loan was deemed “safe.” These exempt loans are known as QRMs; the task of officially defining QRM was left to the wisdom of federal regulators. While the specific details are not yet defined, once they are, QRMs will be the most desirable loans for lenders to make to homebuyers since they will be more profitable and easier on the lenders’ back offices. At issue are the attributes that qualify a QRM, including credit score, debt-to-income ratio, and the granddaddy of show-stoppers, the size of the down payment. (Our thoughts about down payment size) The current down payment proposal for QRMs would provide incentives for lenders to require a minimum down payment of 20 percent.
This proposal, if enacted, would create a new class of loans effectively filling the void left by Alt-A and subprime. Private investors are already lining up to take advantage of higher yields that these non-QRM borrowers will be forced to pay including Lewis Ranieri, once known as the father of mortgage finance. The attraction for investors is that these are not the “subprime” borrowers who bought homes in spite of poor credit and insufficient income to service their debt. These are hardworking individuals and families with stable work histories and excellent credit.
Passage of QRM as proposed would result in these first-time and low to moderate-income homebuyers paying higher rates because they lack the 10-20 percent down payment. And, what if a buyer doesn’t have the required down payment, what would be the alternatives? Furthermore, how badly will non-QRM buyers be dinged? Even under the best case scenario, there is no answer that will help stimulate home sales. Worst case, it would send the housing market to new lows for the foreseeable future.
The campaign to shoot down the proposal that would create incentives for lenders to require down payments of 20 percent is picking up steam. We recently Tweeted this article from Bloomberg News in part due to the interesting diversity of groups coalescing around this cause. More background and helpful information is found in this reprint from Inman News.
Regulators have extended the comment period for the QRM proposal from June 10 to August 1. Let your voice be heard while there is still time!