Friday, December 9, 2011

New mortgage finance proposal underscores need to get QRM right

by Ethan Handelman, National Housing Conference

Senator Johnny Isakson (R-GA) introduced a proposal for mortgage finance reform that would restructure Fannie Mae and Freddie Mac into a government-run Mortgage Finance Agency that would securitize and guarantee pools of loans. The Agency would be on a 10-year path to privatization—along the way, it would accumulate an insurance fund to back the guarantee.

Most telling, however, is that the legislation would limit Agency’s securities to Qualified Residential Mortgages—a category defined in the Dodd-Frank legislation and subject to much debate this summer. To its credit, the proposal redefines QRM to a minimum 5% downpayment with mortgage insurance, which provides broader access to credit than the highly restrictive 20% standard proposed by regulators. It would better, of course, to allow lower downpayment programs as long as they could demonstrate sufficiently low default rate and satisfactory underwriting parameters (like the Community Advantage Program, which has shown impressive results).

In NHC’s comment letter to regulators on the proposed QRM rule, we observed that the QRM standard could become “an unintended government underwriting standard” that could unintentionally “define the mortgage finance space.” Now, we see new legislation that explicitly sets the QRM as the boundary for access to efficient secondary market financing. This underscores why we need to get QRM right—no downpayment restriction and broad access to affordable mortgages for qualified borrowers. The choices regulators make now will have long-lasting, sometimes unintended, consequences.

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