This past Tuesday October 21st, the FDIC was the first of six financial regulators to release the final version of the long-awaited qualified residential mortgage rule (QRM) which stems from the 2010 banking reform bill, also known as the Dodd Frank Act and Consumer Protection Act of 2010.
What does the QRM rule do? It provides a set of requirements a loan must meet to be considered a safe loan and eligible to be sold to investors as part of MBS (mortgage-backed securities) without the lender having to retain 5 percent of the loan amount (known as risk-retention) on its books. A QRM loan comes without the risk-retention requirement which will allow lenders to make more loans and also make them cheaply. They will no longer have to pass on the cost of the risk-retention.
NAR National Association of Realtors has been very vocal that this rule should be broad based and should match up with the Qualified Mortgage (QM) rule (which provides ability to repay standards) which took effect at the start of 2014.
The QRM rule considers a qualified borrower if they have debt-to-income ratio of 43 percent along with other things. There isn’t however an “onerous” down payment requirement, which had at one time been considered, but the NAR lobbied against it.
“NAR applauds the Federal Deposit Insurance Corporation for finalizing the Qualified Residential Mortgage rule today, which includes a broad definition of QRM and aligns with the Qualified Mortgage standard implemented earlier this year,” NAR President Steve Brown says.
“Importantly, the final rule relies on sound and responsible underwriting rather than on an onerous down payment requirement to qualify as a QRM loan,” Brown says. “NAR strongly opposed earlier versions of the rule that included 20 and 30 percent down payment requirements, which would have denied millions of Americans access to the lowest cost and safest mortgages.”
The Rule will take effect in 12 months. This gives lenders time to align processes and requirements.
I don’t often think more rules make something easier and/or better, but in this case it might very well benefit the lenders and consumers. It will provide alignment which helps with clarity and should make loans more available. At the press conference on October 21st the Chief Economist for the National Association of Realtors, Lawrence Yun said “… the alignment of the two rules could help make more credit more available and boost sales.” He also went on to say, “Certainly this is a victory of consumers.”
I agree with Mr. Yun. There is still the issue of low inventories. It’s great that people can get loans but when there is not a lot to purchase there is still an issue with the market.