Monday, October 28, 2013

White paper: QRM proposal strikes the right balance

by Liza Getsinger, National Housing Conference

A new white paper released October 24 by the Coalition for Sensible Housing Policy, titled “Updated QRM Proposal Strikes Balance: Preserves Access While Safeguarding Consumers and Market,” explains why regulators have struck the right balance by proposing a rule to align the qualified residential mortgage (QRM) rule with the qualified mortgage (QM) rule. The product standards in QM ensure borrowers have access to safe, sustainable mortgages, and those same standards can also protect investors by applying risk retention requirements to loans outside of the QM standard. Aligning the two standards also brings much-needed clarity for mortgage markets, which will help lower costs for consumers.

Importantly, new data within the paper indicates the underwriting and loan product limitations mandated through QM effectively limit the risk of default without excluding large numbers of creditworthy borrowers. This new analysis by The Urban Institute shows the new proposed QRM will reduce the risk of default and delinquency by more than half:
  • Loans purchased by Freddie Mac and Fannie Mae that met the re-proposed QRM standard had default rates of 4.1 percent as compared to 8.7 percent for mortgages that did not qualify for QM status.
  • The delinquency rate for mortgages in private label securities originated in or prior to 2013, that did not meet the re-proposed QRM standard, was 30.6 percent. The delinquency rate for purchase and refinance loans that met the new QRM proposal was nearly two thirds lower at 12.6 percent.
The coalition also weighs the alternative proposal in the rule which would require a 30 percent downpayment to qualify as a QRM loan. This option would unnecessarily slice the secondary market in two and exclude 60 percent of homebuyers from the most efficient form of financing while disproportionately burdening communities that have historically not been well-served by capital markets.

“In synchronizing the definition of QRM with QM, the revised rule will encourage safe and financially prudent mortgage lending, while also creating more opportunities for private capital to reestablish itself as part of a robust and competitive mortgage market,” the paper concluded. “Most importantly, it will help ensure creditworthy homebuyers have access to safe mortgage financing with lower risk of default.”

The Coalition for Sensible Housing policy, of which NHC is a member, brings together a wide range of housing stakeholders. See the full coalition list at the Coalition for Sensible Housing Policy website.

The entire white paper can be found here.

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