WASHINGTON (May 12, 2011) - A proposed rule to define qualified residential mortgages (QRM) under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) would unnecessarily restrict access to home ownership. Realtors® at the Real Estate Services Forum – The Impact of Dodd-Frank on Real Estate session today during the Realtors® Midyear Legislative Meetings & Trade Expo gained insights into the implications of a narrowly defined QRM.
“As the leading advocate for housing and home ownership, NAR firmly believes Congress intended to create a broad QRM exemption – strong evidence shows that responsible lending standards and ensuring a borrower’s ability to repay have the greatest impact on reducing lender risk, and not high down payments.,” said NAR President Ron Phipps, broker-president of Phipps Realty in Warwick, R.I. “Saving the necessary down payment has always been the principal obstacle to buyers seeking to purchase their first home. Proposals that require high down payments will only drive more borrowers to FHA, increase costs for borrowers by raising interest rates and fees, and effectively price many eligible borrowers out of the housing market.”
On July 21, 2010, President Barack Obama signed the Dodd-Frank Act into law. A provision in the Act requires that financial institutions retain 5 percent of the risk on loans they securitize. The purpose is to discourage excessive risk taking and create strong incentives for responsible lending and borrowing. Exempt from the requirement are certain QRMs; FHA and VA mortgages are also exempted.
Six agencies are developing the risk retention regulation – the Department of Housing and Urban Development, Federal Deposit Insurance Corp., Federal Housing Finance Agency, Federal Reserve, Office of the Comptroller of the Currency, and the U.S. Securities and Exchange Commission.
The proposed rule narrowly defines QRMs, requiring an 80 percent loan-to-value, which necessitates a 20 percent down payment. The rule would also limit mortgage payments to 28 percent of gross income, a very tight standard.
“There’s nothing simple about this,” said Jay Varon, Partner, Foley & Lardner LLP. Varon spoke as part of a panel during the session that also included Phillip L. Schulman, Partner, K & L Gates; and Steve Adamo, President and CEO, Weichert Financial Services. The panel outlined a “baker’s dozen” of issues related to Dodd-Frank that affect the lending industry and consequently, future home buyers and sellers.
“The theme of this legislation was skin in the game,” said Schulman. “Congress came up with the QRM concept to ensure that banks were only putting up ‘safe’ loans for securitization. Sounds good, but in practice, it’s a problem. Regulators have now come up with very draconian and narrow parameters for what constitutes a QRM.”
Schulman explained that this wouldn’t just affect buyers, but would also affect the ability of home owners to sell their homes, since there would be fewer buyers who could qualify for home ownership.
According to NAR Research, 60 percent of recent home buyers made less than a 20 percent down payment, and it would take 14 years for a typical person to save up a 20 percent down payment to buy a median-priced home.
NAR wants federal regulators to honor Congressional intent by crafting a QRM exemption that includes a wide variety of traditionally safe, well underwritten products such as 30-, 15-, and 10-year fixed-rate loans; 7-1 and 5-1 ARMs; and loans with down payments in the 5- to 20-percent range with mortgage insurance, where required, and with other features found in low-risk loans such as no prepayment penalties or balloon payments.
“The definition of QRM is important because it will determine the types of mortgages that will generally be available to borrowers in the future,” said Phipps. “Borrowers with less than 20 percent down will have to choose between higher fees and rates today, up to 3 percentage points more, or a 9-14 year delay while they save up the necessary down payment. Realtors® are working hard to make sure that this doesn’t happen, and that those creditworthy buyers who are able and willing to assume the responsibilities of owning a home can continue to achieve their home ownership dreams.”
For more information about the Realtors®Midyear Legislative Meetings & Trade Expo, visit www.nar.realtor/midyear.nsf/pages/homepage.The National Association of Realtors®, “The Voice for Real Estate,” is America’s largest trade association, representing 1.1 million members involved in all aspects of the residential and commercial real estate industries.
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