Why QRM Is Such a Worrisome Proposal

By Robert Freedman, Senior Editor, REALTOR® Magazine

In a small but important development, banking regulators agree to push back the deadline for public comment on their controversial 20-percent minimum down payment proposal.

NAR has been talking a lot about the qualified residential mortgage (QRM) proposal in recent months. That’s because of its severe consequences to home sales if it gets carried out.

The proposal would require lenders to retain 5 percent of the value of loans they originate (for loans that are securitized, excluding Fannie and Freddie) unless the loans have at least 20 percent down. If they meet that down payment requirement and other stiff underwriting requirements, the 5 percent risk retention requirement is waived, so these loans will be far more affordable than loans for which the standards aren’t met. In fact, the pricing difference could be as high as 225 basis points, NAR Research estimates. Should interest rates rise later this year, think of how hard home sales could be hit if on top of these higher rates borrowers have to pay 225 basis points more. And the fact is, with a minimum 20 percent down required for loans to qualify for the 5-percent exemption, the vast majority of borrowers will have to go for the more expensive financing — assuming they can even afford that financing.

How did NAR come up with the 225 basis-point estimate? We learn about that and all of the data behind NAR’s concerns with the QRM proposal in a short video interview with NAR’s manager of regional economics, Ken Fears. He walks us through how researchers identified the consequences of the QRM proposal based on data from lenders, mortgage insurers, and the federal government.

The good news is that Congress has heard the concerns of NAR and others and asked banking regulators, who proposed the rule, to push back its deadline for accepting public comments on its rule. Dozens of members of the Senate and almost 150 members of the House wrote to the banking regulators asking them to delay the comment deadline, and regulators responded with an extension to August 1 from June 10. The delay makes clear that regulators heard Congress’ concerns about moving too quickly on such a potentially destabilizing rule.

More about QRM.

Robert Freedman

Robert Freedman is director of multimedia communications for the NATIONAL ASSOCIATION OF REALTORS®. He can be reached at rfreedman@realtors.org.

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  1. Mabel Guzman

    This would terribly reduce access to housing based on a study By the Center for Responsible Lending it would take borrowers up to 14 years to save 20% down based on national medians of income of $50k and home price of $172k. Furthermore Height Analytics studied 2009 mortgages and found 47% put less than 10% down. This would wipe out half the sales and the additional revenue generated from the purchase of a home. Not only housing would be impacted negatively communities at large would see less stabilization in light of what is currently happening and produce job loss more so. Housing is an under pinning of the economy, QRM is more than worrisome it is a dangerous proposal.

  2. Bob

    Although there may be some downside in these times, I see nothing wrong with tightening up responsible lending standards (15%-20% down) and pass legislation that will make it impossible for consumer credit and real estate borrowers obligations to be forgiven, unlike today, where folks (& institutions) can walk away basically penalty free, leaving the taxpayers, etc with the tab and consequences thereof. Teach and practice financial responsibility in schools (and government) at a young age and there may be more honest prosperity in the future.

  3. The Federal Government’s QRM proposal would toughen debt restrictions on mortgages:

    1. Min down payment 20% (currently 3.5%)
    The result would be a continual shrinking of number of buyers, removing their ability to purchase a home for at least 16 years.

    2. Maximum Debt to Income Limits 28% Housing / 36% of Total Debt (currently 45% of Total Debt)
    Again – shrinking even more the number of buyers and totally ignoring the more realistic approach of evaluating a person’s “residual income” (i.e. A family that makes $10,000 a month would have $7,200 left to spend if a quarter of their income goes toward the mortgage. By contrast, a family that earns $4,000 a month has less than $2,900 left).

    3. Requiring Banks to maintain a stake in every mortgage loan lent (currently 99% sold, retaining servicing payments)
    BASEL III which the U.S. Bank’s are now following will greatly increase their reserve requirements and dramatically reduce the Mortgage loans Banks will be able to do!!

    What “unintended consequences” do you think will happen if the Federal Government implements this QRM plan??

  4. This proposal would make us a nation of renters further eroding consumer confidence and stable neighborhoods. At a time when wages are flat or decreasing, interest savings are garnering less than 1% the talk of saving 15%-20% for a home plus closing costs is disingenious. Homeowners who put 15% or 20% down are still walking away if their home is underwater.In some cases it’s because one of the owners has lost their job or they call it a business decision and decide to go another direction.

  5. If we really want to bring this countries economy to it’s knees and start a world wide depression then this would do it! Cut the homes sales by 3/4 th and this will happen. The auto market, lending markets, and all other markets are greatly effected by the housing market. Stop the flow and the economy will crumble almost over night…This is an absolutely STUPID idea and if passed, I and a lot of people will be in bread lines very quick. Very few people can buy a home with 20% down, it is only about 15-25% of the market. You crumble the economy and even these buyers will sit on the sidelines in fear as the economy crumbles around us all. This law would lead to the Perfect Storm that would effect the entire world ecopnoy very quickly. Money would stop flowing, the US would be sure to default on our HUGE National Debt. This is Insanity,

  6. Leighton Allen

    If you want a housing recovery anytime in the next 5 years then 20% down is a very bad idea. Now there is to much supply and not enough demand because buyers are having problems getting loans. Without buyers the market will continue to fall.

    I see couples that get divorced and when they qualified for the house it was based on two incomes. When the couple cannot sell the house then it goes to foreclosure and adds to the housing crisis.

    I also see people that have a job relocation and they cannot sell the house and they don’t want to be long distance landlords. They try everything to sell the house but when buyers can’t get loans it doesn’t matter what you do. Eventually they have to choose between paying the mortgage/rent of the place they are living in or paying the mortgage on a vacant house.


    I propose that a better way to do mortgages is a 80-10-10.

    The buyers would need to bring a minimum of 10% cash that they saved up and the mortgage originator would take back a second mortgage for 10% that they must hold for a minimum of 5 years. Since the first mortgage is at 80% it could be securitized.

    Since the majority of loans that went bad occurred in the first 3 years the mortgage originator would also have skin in the game if they were required to hold 10% back for a minimum of 5 years.

    FYI – The medium priced home in my area is $165,000 so I am not sure how well this would work where the medium priced house is $400,000.

  7. Joyce R

    In theory, it sounds like a good way to protect the lender. However, theory does not always work in the real world. In a really good market, it might be ok, but would still restrict many people from homeownership. It could be that way too many people who did not qualify for a loan were able to get them anyway with the No doc loans, etc and with the previous years of losening the requirements.

    There has to be a middle ground for our real estate market not to take a nose dive off a cliff. Given the current market, requiring 20% down is one of the best ways to kill the remainder of the marketplace. Not only will there be MANY fewer people who cannot qualify, the real estate and banking/lending markets will decrease drastically, adding to the unemployed people, even if we are independent contractors. Those numbers might not be counted in the tally of the unemployed, but believe me, lost agents and lenders would be unemployed in the current market.

    The wise advice they are proposing from Washington should be discussed with people who live in the real world before proposals like this are made in the future. Of course, we all know that will not happen, as the theorist don’t work in the real world, they work in education and government. What more needs to be said.

  8. JFL

    Like everything else the “regulatory rush” to “fix” something is misguided. Even after careful debate on the merits of this proposal, if it was decided that these ratios were necessary, they should be phased in over time so they will not cause a screeching halt to a fragile housing recovery. Its not the size of the down payment that caused all the grief but the underwriting standards that were poorly deployed.
    When my child saves many years to accumulate 10% down and she is responsible in dealing with her credit accounts she should be able to obtain a mortgage. Tighten lending scores, but dont hurt responsible borrowers.