Federal banking regulators have re-proposed the qualified residential mortgage (QRM) rule, which requires lenders to hold back 5 percent of the loan amount on securitized home mortgage loans unless they originate the loans based on “safe” guidelines, which are defined in the rule.
Those safe loan guidelines track requirements in the qualified mortgage (QM) rule, which was released last year and which NAR generally supports. (QM defines safe mortgage guidelines for federally backed loans, whether or not they’re securitized. QRM only applies to securitized loans.)
Regulators are now taking public comments on the QRM rule, and although the rule tracks NAR recommendations in key respects, regulators are seeking views on whether an alternative approach should be considered. That alternative approach specifies a minimum down payment requirement, which NAR and its partners in a coalition, the Coalition for Sensible Housing Policy, oppose. So, more work will be needed in the months ahead to let regulators know that the alternative approach raises concerns among industry groups.
Both QM and QRM are to be finalized in early 2014 under the Dodd-Frank financial services reform law that was enacted two years ago.
When you’re busy selling real estate or running a brokerage, you can’t be expected to follow every twist and turn in Washington over this rule or that rule. But there was one important twist just a few weeks ago that will make a genuine difference in your business—and yet you won’t notice a thing. That’s why it’s so important.
On July 2, the Federal Reserve released its rule implementing the international BASEL III capital standards. Originally, the Fed wanted to require banks to hold more capital in reserve for most of the residential mortgages they make, which would have made these loans far less attractive to banks than other types of products. What’s more, costs to your buyers would have gone up significantly. But when the rule came out, the increased capital requirements weren’t in there—they were one of the few things the Fed changed prior to publication.
Why? Because the National Association of REALTORS® and other real estate organizations made a clear case for not harming the attractiveness of home mortgage lending in the way that had been proposed.
To be sure, had the changes taken effect, business would have dropped off and the real estate market weakened. But NAR and the others also made it clear that the risk-weighting just wasn’t necessary, in part because the bad exotic loans of the housing boom were now a thing of the past and also because the upcoming qualified mortgage (QM) rule set standards for strong loans without requiring banks to hold more capital.
QM takes effect early next year, but banks are already underwriting to its standards and the loans are performing well. So with these new underwriting standards in place, the added reserve requirements simply aren’t needed. And the Fed agreed.
NAR still has concerns with the QM rule, but for the most part, the rule came out with sound standards that the association can support. (The outstanding concerns have to do with a cap on certain fee limits, and NAR is continuing to let regulators know why they’re a problem.)
With QM and BASEL III released, there’s much less of the regulatory uncertainty that lenders have been concerned about since the big Wall Street reform bill, Dodd-Frank, was enacted a few years ago. There’s still one more important rule to come out: the qualified residential mortgage (QRM) rule that is intended for loans packaged into securities and sold to investors. But putting that rule aside, the regulatory environment is much clearer now than it was just a few months ago. And so far, regulators are showing that they understand NAR’s mantra about doing no harm to the market.
To make the impact of the BASEL III rule more clear, NAR regulatory analyst Charlie Dawson and Senior Economist Ken Fears sit down for a discussion that gets at the heart of the issue in this 4-minute video.
Coverage of the 2013 State of the Union speech:
President Barack Obama in his first State of the Union speech since winning election to a second term said the federal government needs to streamline rules that are making home purchases and mortgage refinances too hard for creditworthy households. He also urged Congress to tackle tax reform, despite all the other priorities on its agenda, and he said homes and commercial buildings must be part of the country’s effort to improve energy efficiency.
The President also touted his initiative to help rebuild communities hard hit by the economic slowdown by incubating new businesses and working with public and private partners to rebuild vacant homes.
“Our housing market is healing . . . and homeowners enjoy stronger protections than ever before,” the President said at the beginning of his speech. But among the country’s unfinished business, he said, is the continuing difficulty among households to get mortgage credit.
“Even with mortgage rates near a 50-year low, too many families with solid credit who want to buy a home are being rejected,” the President said. “Too many families who have never missed a payment and want to refinance are being told no. That’s holding our entire economy back, and we need to fix it.”
Obama pointed to legislation pending in Congress to encourage refinancing by underwater and other struggling borrowers who’ve remained current on their mortgage. The legislation “would give every responsible homeowner in America the chance to save $3,000 a year by refinancing at today’s rates,” Obama said. “Democrats and Republicans have supported it before. What are we waiting for? Take a vote, and send me that bill.”
There are a number of mortgage refinance bills pending in Congress, including the “Responsible Homeowners Refinancing Act” by Sens. Robert Menendez (D-N.J.) and Barbara Boxer (D-Calif.) to streamline refis of Fannie Mae and Freddie Mac loans, and a bill to let struggling borrowers refinance into FHA loans, among others.
Obama also echoed real estate industry concerns over the qualified mortgage (QM) and qualified residential mortgage (QRM) rules, which federal banking regulators have been working on since passage of the big Wall Street reform law that was enacted two years ago. QM was issued earlier this year and lays out broad-based lender requirements to ensure loans are made only to borrowers who can reasonably be expected to meet repayment obligations. QRM is still to be released. It sets additional restrictions on lenders for loans that would be packaged into mortgage backed securities and sold to investors. NAR and other industry and consumer groups back broad-based, flexible standards and remain concerned that QRM restrictions that go beyond QM could keep the availability of mortgage credit too tight.
“Right now, overlapping regulations keep responsible young families from buying their first home,” Obama said. “What’s holding us back? Let’s streamline the process, and help our economy grow.”
The tax reform agenda the President laid out included no specifics, but on individual taxes, he called for eliminating “tax loopholes and deductions for the well off and well-connected.” He also called for simplifying taxes for small businesses. On corporate taxes, he called for “a tax code that lowers incentives to move jobs overseas and lowers tax rates for businesses and manufacturers that create jobs right here in America.”
More detail on what he has in mind for tax reform will likely be included in his Administration’s 2014 budget request, which he’s expected to submit to Congress in mid-March.
Obama said his goal for home and commercial property energy efficiency is a 50 percent reduction in energy waste. “Let’s cut in half the energy wasted by our homes and businesses over the next twenty years,” he said. “The states with the best ideas to create jobs and lower energy bills by constructing more efficient buildings will receive federal support to help make it happen.”
Obama’s initiative to help economically hard-hit areas by rebuilding vacant homes isn’t new; he’s touted what he calls “Project Rebuild” before. In last night’s speech he talked about his plan to ramp it up a bit by partnering with “twenty of the hardest-hit towns. . . . We’ll work with local leaders to target resources at public safety, education, and housing. We’ll give new tax credits to businesses that hire and invest.”
All of these and other domestic initiatives the President referenced, including a public-private effort for rebuilding the country’s aging bridges, ports, and other infrastructure, are intended to help boost the economy and the middle class, which he said has been disproportionately hard hit for the past decade. “It is our generation’s task . . . to reignite the true engine of America’s economic growth—a rising, thriving middle class,” he said.
Thanks to low interest rates, home owners are refinancing their home mortgages in sizable numbers, and that’s great for them and for the economy, because it helps free up money that can be put to other uses. A Bloomberg report earlier this week put the refi volume at a projected $932 billion for this year, up from $858 billion in 2011.
It’s a good guess the federal government is taking a strong interest in these numbers. Among all the efforts that the government has undertaken to help resolve the housing crisis and spur economic growth, none has been more central than its efforts to spur refinancing among struggling home owners. The government’s HARP program (Home Affordable Refinance Program) is all about providing incentives to borrowers to refinance their mortgage into something they can more easily handle. Incentives are provided to lenders and investors, too, to let borrowers do that.
To date, the government’s refi efforts have produced modest results, with roughly a million refis over the last few years, far fewer than the 3-4 million that was intended.
Without a doubt, the government should continue to look for ways to work with borrowers, lenders, and investors to spur refinancing. But what the Bloomberg report makes clear is that refis shouldn’t be the government’s only focus for improving the housing picture, especially if one of the government’s goals is to inject money into the economy through these refinancings. That’s because these refinancings, while they can be expected to free up some $2,900 a year for each home owner on average (assuming a typical $200,000 mortgage), exactly how much of that money will make its way into the economy as new spending is unclear. Economists interviewed for the report differ, but several say much of this money will go to shoring up home owners’ savings or paying down other debt, so only over time will the money make it into the economy as new spending.
In other words, even though the refis are important and ultimately beneficial, don’t expect them to jolt the economy with new spending.
The modest immediate benefit of refis shows just how important it is for the government to take a balanced approach to addressing the housing challenges today, and that means thinking long and hard about what we need to spur new purchases of homes. Clearly, rule one should be to do no harm, a refrain that NAR and others have been making for several years now. Doing no harm means taking a reasoned approach to banking regulators’ proposed qualified mortgage (QM) and qualified residential mortgage (QRM) rules. The QM rules will require lenders to make loans only to borrowers who can demonstrate the ability to repay, and the QRM rules will require lenders to hold 5 percent on their books for home loans they securitize and sell to investors, unless the loans meet certain “safe” underwriting standards. Loans that meet the “safe” standard don’t come with the hold-back requirement, making them more affordable to borrowers.
With these rules, the devil is in the details, and NAR has called for QM to give lenders sufficient flexibility so that a wide range of qualified, responsible borrowers can get affordable loans, not just borrowers with gold-plated credit profiles, and has also called for the QRM rules not to include a minimum down payment requirement, among other things, that would make it hard for many households to get a loan.
NAR is also looking closely at proposed bank capital standards in Basel III, the international banking protocol, that could force lenders to hold so much capital for home loans that, again, only borrowers with the best credit risk will be able to get affordable financing.
Other rules and laws that generate concern are being explored, but the point is clear: Although the government is right to look for ways to help troubled borrowers refinance into something more sustainable, the government at the same time must take reasonable steps on the new-purchase side of the equation. Not only is shaping these proposed rules in a reasonable way the right thing to do from a policy standpoint, but we can expect good rule-making to have a boosting effect on the economy as well, because new home purchases are the time-tested way for injecting money into the economy as new owners spend on upgrades, furnishings, and all the other things that make housing such an integral part of the economy. Encouraging refis is only half the equation.
Capital and mortgage financing rules being drafted in Washington and elsewhere raise the possibility that the United States will become increasingly split between affluent home owners and less affluent renters, because lenders will be constrained to stay within tight mortgage underwriting rules that many households won’t be able to penetrate.
That’s the grim assessment of a meeting of several dozen housing, consumer, and other organizations in Washington last week to look at the regulations coming down the pike as a result of the housing bust several years ago.
The meeting of the Coalition for Sensible Housing Policy, hosted by NAR at its Washington offices, heard from a panel of some of the country’s most highly regarded banking and mortgage financing experts, including Lew Ranieri, one of the creators of the mortgage-backed securities (MBS) market, Gene Ludwig, the U.S. Comptroller of the Currency under President Bill Clinton, and Jim Millstein, a Treasury official who oversaw the restructuring of insurer AIG in the aftermath of the mortgage crisis.
“We’re going to look back at these regulations five years from now and wonder, ‘What the heck did we do?’” said Millstein.
The regulations that have so many in the industry worried are two from the Dodd-Frank Wall Street Reform Act enacted two years ago: QM and QRM. QM stands for “qualified mortgage” and the rule would set standards for lenders to ensure they only make loans to borrowers who have the ability to repay them. The rules would apply to all mortgage loans. QRM refers to “qualified residential mortgage” and the rule would set minimum underwriting standards for loans that are packaged into securities and sold to investors. QRM applies only to securitized loans, with the exception of Fannie Mae and Freddie Mac loans, although once those two companies are out of U.S. conservatorship, their loans would be subject to QRM as well.
A third rule that is now on the horizon is known as Basel III, a set of proposed international banking standards being written in Basel, Switzerland, that would include requirements on how much capital banks must hold on their books based on the type of loans they make. In previous Basel iterations (Basel I and Basel II), the rules apply only to the largest banks, but there is concern that aspects of Basel III could apply to regional and community banks as well. The rules don’t have the force of law unless countries choose to adopt and enforce them. Banks in countries that have not adopted the rules might still have to abide by them, though, if they do business in countries that have adopted them.
Against these proposed rules are other factors that threaten to dramatically change the home ownership landscape: what to do with the two secondary mortgage market companies, Fannie Mae and Freddie Mac, which are now into their fourth year of conservatorship, and what to do with FHA, which has seen its market share soar since the housing bust but has analysts worried about its exposure.
A similar risk exists with QRM. If that rule requires a minimum down payment, such as 20 percent, much of the first-time buyer market outside of FHA would disappear.
Among the Basel III proposed standards that are troubling are finely detailed risk-weighting requirements that would force banks to hold more capital for all but the most conservative loans.
All three of these new rules becoming final in their current form would effectively create a have and have-not market in the U.S., “creating disparities outside of FHA that are very uneven,” said David Stevens, president and CEO of the Mortgage Bankers Association and 2009-2010 FHA Commissioner.
There’s some irony there, Stevens suggested. Because HUD and the new Consumer Financial Protection Bureau (CFPB) are writing “disparate impact” rules that would penalize lenders for loan practices that widen the disparities between borrowers. Thus, lenders face the possibility of adhering to QM, QRM, and Basel III and getting slapped with disparate impact penalties as a result. “This is leading to a real challenge around fair lending,” said Stevens.
There’s another irony as well, and that’s a delay in the day when Fannie Mae and Freddie Mac can be taken out of conservatorship and possibly replaced, paving the way for the development of a fully private mortgage market, which both the federal government and industry participants say they want. Right now, Fannie, Freddie, and FHA comprise the lion’s share of the mortgage market—by some estimates, more than 90 percent. If QRM rules are too tight, the federal government will face pressure to keep Fannie and Freddie under conservatorship rather than let their loans become subject to the new rules.
Thus, the industry finds itself on the horns of a dilemma: On the one hand, overly tight regulations will force all but a few borrowers into government-backed loans, delaying the development of a private market, while on the other, even when a private market is developed, it will be a sharply divided one, catering only to wealthy households that can meet the tight standards while everyone else must use FHA (or Fannie and Freddie, if they remain in some form), or be forced to stay in the rental market.
“What I see now is a turn away from home ownership in America,” said Sen. Johnny Isakson (R-Ga.), who provided closing remarks at the meeting, “an inability to finance home ownership. And a rental America is weaker than a home owner America, I can tell you that. We’re a nation of owners and not tenants, and that’s one of the great differences between the United States and many other countries. So, we’ve got to be really outspoken. Otherwise, if these rules start coming down after the election on Nov. 6, the administration is going to face not only a protracted unemployment of 8 percent, but a draconian drop in consumer confidence as housing becomes out of reach for almost everybody.”
Other presenters at the meeting were Jim Parrott of the National Economic Council, Michael Calhoun of the Center for Responsible Lending, Ray Natter, former counsel with the OCC and Federal Reserve, Susan Wachter of the University of Pennsylvania, and Brian Gardner, a Washington policy analyst with Keefe, Bruyette & Woods.
It’s the QM rule’s turn in the spotlight, and so far a federal proposal raises concerns
If you’re applying for a loan, what determines whether or not you can repay that loan?
That’s what a federal regulator is trying to determine right now, and based on a proposed rule they’ve written, they’re thinking about setting standards that NAR and other industry groups—and consumer groups, too—think will make it hard for even creditworthy households to get a home loan.
The regulator is the new Consumer Financial Protection Bureau and the rule it’s writing is called the qualified mortgage (QM) rule. CFPB is trying to define the way banks measure a loan applicant’s ability to repay a loan: what the applicant’s monthly debt-to-income ratio is, what the monthly mortgage payment would be, what the applicant’s credit history is, and so on.
NAR and some 40 partners in a coalition sent CFPB a letter not long ago saying “ability to repay” should be defined in broad terms, otherwise lenders’ ability to make loans to all but the most creditworthy households would be constrained.
It’s like last year’s battle over the proposed QRM rule all over again.
If you remember the QRM rule, it was supposed to set its own underwriting standards, although with applicability limited to loans that are included in securities and sold to investors. If the loan met the QRM standard, lenders can sell 100 percent of the loan to investors. If the loan didn’t meet the standard, lenders can still make the loan but they have to retain 5 percent of the loan amount on their books. That means these non-QRM loans would be expensive for borrowers, adding to the cost of buying a house and blocking some households from buying.
NAR and other groups, inluding consumers groups, built such a strong case against the proposal (in part because it considered requiring a strict downpayment requirement) that regulators have shelved the rule while they weigh all the input they received.
Here we are a year later and CFPB is writing the QM rule, which is a more general ability-to-repay rule that applies to all mortgages, securitized as well as non-securitized loans, and once again regulators are weighing a narrow definition that could include overly prescriptive standards that would make it hard for lenders to make any loans except to the most creditworthy borrowers.
Will CFPB go down the same road as the Federal Reserve and other regulators that drafted the proposed QRM rule? Let’s hope not.
But there’s another concern with the QM rule, and it has to do with the legal standard that lenders will have to meet if a loan goes bad.
CFPB is weighing whether to hold lenders to what’s known as a rebuttable presumption standard of legal culpability or give them a “safe harbor” under which they can protect themselves from lawsuits of questionable merit by borrowers who default on their mortgage.
“Rebuttable presumption” and “safe harbor” are legalistic terms, but underlying them are simple concepts. If CFPB decides to use a rebuttable presumption standard, any borrower who defauts on his loan and believes the lender didn’t technically meet the ability-to-repay standard can bring an action against the lender. Even if the lender were to prevail against the action, it still has to defend itself, which is costly, time-consuming, and resource intensive. Multiply that by the number of actions taken against it and you can see that lenders might just throw up their hands and refrain from making any loans except to the safest, most creditworthy borrowers.
The safe harbor approach, which NAR and its coalition partners support, is far less likely to lead to a retreat from the market by lenders, because it saves them from having to defend against each and every defaulting borrower as long as the loans it makes follow the ability-to-repay standard. Borrowers who default can still sue but the case can be immediately dispensed with if the lender has met the safe harbor. At the same time, you can expect the loans to be relatively safe, because they would have been underwritten using the federal standard.
There’s more to these issues, and any time you try to write about legalistic issues in non-legal terms, you run the risk of over-simplifying, so you can read the proposed rule for yourself.
The bottom line has to do with what makes sense for the market. If we want lenders to make safe loans to more than just the most creditworthy borrowers, then CFPB should write a QM rule that broadly defines the ability to repay and that provides a legal safe harbor for lenders. A rule that narrowly defines the ability to repay and that gives defaulting borrowers too-easy legal standing to sue reopens last year’s QRM debate.
The Center for Responsible Lending (CRL) and a research institute of the University of North Carolina just released the results of an exacting study on how borrowers would fare under different QRM scenarios and they don’t look good. Let’s hope CRL made its results available to federal regulators and lawmakers so they have a picture of what could happen if regulators proceed with their plan to require a high down payment for loans to fit under the qualified residential mortgage (QRM) definition.
To refresh your memory, the idea behind QRM loans comes from the big Wall Street reform law enacted about two years ago. The law requires lenders to retain 5 percent of the value of the loans they originate for securitization and sale to investors. That’s a requirement that will drive up the cost of financing for borrowers because it forces lenders to put up capital against risk.
But there’s an alternative to this expensive scenario, and that’s QRM loans. If the loans meet these QRM standards, they’re considered safe, so lenders that originate the loans for securitization don’t have to put up 5 percent. That’s good, except that regulators drafted a definition of QRM loans that would require a large down-payment—as high as 20 percent—along with other credit requirements.
The position of NAR as well as some 40 other organizations, including consumer organizations, is that the Wall Street reform law never intended QRM to impose a minimum downpayment requirement; rather, it only sought to ensure that loans are soundly underwritten.
As it is, the Wall Street law includes another provision that in fact does base loan safety on sound loan terms rather than downpayment amount: the qualified mortgage (QM) provision. Among other things, only conventional 30-year fixed and adjustable-rate mortgages can qualify as QM Loans, and lenders have to assess borrowers based on their ability to repay. There’s nothing in the provision that talks about minimum downpayments or other credit reqirements.
Under CRL’s analysis, which is based on about 20,000 loans made between 2000 and 2008, the default rate for loans that meet the QM definition—at a bit under 6 percent– is about half the default rate for all loans made during that period. Almost 6 percent is historically high, but as CRL points out, the period between 2000 and 2008 is not a typical period from a historical persective, since it encompasses the housing market crash and the extremely deep recession that followed on its heels.
But the difference between the two sets of loans shows that the QM standard does what it’s supposed to do: keep defaults at a comparatively reasonable level while still allowing creditworthy borrowers to get financing. This latter point is key, because it’s easy to keep default rates low—if you make standards so tight that only wealthy borrowers with the best credit profile can get financing. What the QM standard shows is you can limit defaults while still keeping financing available.
But as soon as you turn those QM loans into QRM loans and add minimum down payment requirements and other credit restrictions on borrowers, you in fact improve default rates a bit more but at the tremendous cost of pushing most borrowers out of the market. In the CRL data, the default rate on QRM loans with 20-percent down drops something over a percentage point, but to get that modest improvement more than 60 percent of otherwise creditworthy borrowers are pushed out of the market.
The take-away from CRL’s findings is pretty clear: if the federal government wants to curb bad loans without pushing out millions of otherwise creditworthy households from the market, the QM standard seems to do the job just fine. The downpayment and other credit requirements of QRM are unnecessary and harmful.
Lawmakers should look at these findings carefully. Here’s a link to the full study, called Balancing Risk and Access.
By Robert Freedman, Senior Editor, REALTOR® Magazine
Federal banking regulators’ proposed qualified mortgage rule, which comes out of the big Wall Street reform act last year, is all about ensuring lenders only write loans that borrowers can reasonably be expected to repay. NAR’s interest in the rule is pretty simple: ensuring that the requirements protect borrowers while balancing lenders’ incentive to lend to more than just the most creditworthy borrowers. NAR also wants to ensure sellers who occasionally provide financing to buyers don’t inadvertently get caught in the rule’s requirements.
All this is fairly straight-forward, but if you stop for a minute and think about the QM rule it’s really an astonishing piece of work—not the rule itself but that Congress and the Administration felt there was a need for it. It’s a little like the department of motor vehicles in your state writing a rule making it illegal for you to drive your car off a cliff. You would think your own self-interest would keep you from doing that, but if enough people are driving off a cliff, then, yes, the DMV might feel it must step in and tell you not to.
The comparison between the rule and an overly protective DMV is apt because QM requires lenders to do what they should be doing anyway, at least if they want to stay in business: make loans that are reasonable for borrowers to pay back. That means limiting the loan amount based on how much borrowers earn, verifying those earnings, and imposing terms that make sense.
Yet, as we all know, during the housing boom lenders weren’t doing that. They were making no-down, stated-income loans to borrowers who had poor credit histories and little income. Why would they do that?
We already know the answer to that, too: Wall Street investment banks wanted those loans because they could package them into securities and sell “tranches” of the securities, divided up by risk level, to investors. The highest rated tranches were considered the safest and they received a Triple-A rating, and lower-rated tranches were considered more risky and investors got a better risk-reward ratio for those.
All this sounds fine except maybe those Triple-A rated tranches. Triple-A means there’s very little likelihood of default. Germany has a Triple A rating. So does ExxonMobil. And up until just a month or so ago the United States had a Triple A from Standard & Poor’s. So, investors were supposed to believe that those Triple-A tranches, which in some cases were comprised of as much as 85 percent subprime loans, were as little likely to default as Germany. By what calculation could Standard & Poor’s and other rating agencies reasonably determine that those tranches were safe? Continue reading »
By Robert Freedman, Senior Editor, REALTOR® Magazine
For the past several months it’s been all QRM all the time, but now there’s QM.
As many real estate professionals are familiar with by now, thanks in part to an NAR Call for Action and lots of communication on the matter, banking regulators’ proposed qualified residential mortgage (QRM) rule has 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. A majority in Congress in both chambers are up in arms over the proposal, too.
The ball’s in regulators’ court now. They’re looking at thousands of comments and will be signaling at some point their intentions for how they’ll change their proposed rule, if at all. (The regulators are HUD, FDIC, OCC, SEC, Federal Reserve, and the Federal Housing Finance Agency.) Continue reading »