Presented by the
C OALITION FOR S ENSIBLE H OUSING P OLICY
American Bankers Association
American Escrow Association
American Financial
Services Association
American Land Title Association
American Rental Property
Owners and Landlords Association
Asian Real Estate Association of America
Black Leadership Forum
Center for American Progress
Center for Responsible Lending
Colorado Mortgage
Lenders Association
Community Associations Institute
Community Home Lenders Association
Community Mortgage Lenders of America
Community Reinvestment
Coalition of North Carolina
Consumer Federation of America
Consumer Mortgage Coalition
Council Of Federal Home Loan Banks
Credit Union National Association
Enterprise Community Partners, Inc.
Habitat for Humanity International
HomeFree USA
Homeownership Preservation Foundation
Independent Community
Bankers of America
International Association of Official Human Rights Agencies
Leading Builders of America
Louisiana Bankers Association
Mortgage Bankers Association
Mortgage Insurance Companies of America
NAACP
National Association of Federal Credit Unions
National Association of Hispanic Real Estate Professionals
National Association of Home Builders
National Association of Human Rights Workers
National Association of Neighborhoods
National Association of Real Estate Brokers
National Association of REALTORS®
National Association of the Remodeling Industry
National Community
Reinvestment Coalition
National Fair Housing Alliance
National Housing Conference
National NeighborWorks Association
National Urban League
National Real Estate Investors Association
North Carolina Institute for Minority Economic Development
Real Estate Services Providers Council
Real Estate Valuation Advocacy Association
The Realty Alliance
Texas Bankers Association
U.S. Conference of Mayors
Worldwide ERC
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The Dodd-Frank Wall Street Reform and Consumer Protection Act
(Dodd-Frank Act) required regulators to create two new mortgage classification rules. One imposes a requirement on originators to underwrite loans with an eye toward the consumer’s ability to repay the loan, while the other is an investor protection rule that would require issuers of mortgagebacked securities (MBS) to retain part of the credit risk associated with certain mortgages underlying the securities.
QM was designed to protect consumers from unsustainable loans.
The QRM rule was designed to protect investors by effectively limiting mortgages to traditional products. These rules should be aligned, as the objectives are consistent: safe loans for borrowers perform well for investors.
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Mandated by Dodd-Frank, the Ability to Repay rule is intended to protect consumers against risky and unsustainable mortgage loans.
The Consumer Financial Protection Bureau (CFPB) recently issued the final rule, which required originators to confirm a consumer’s ability to repay the mortgage by looking at specific criteria, including verified income and assets. The final rule also excluded the risky loan terms most closely associated with the housing crisis, including:
• “No doc” loans
• Negative amortizing loans
• Interest-only loans
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The rule also set a maximum “back end” debt-to-income ratio of 43% and limited the safe harbor to prime loans, ensuring that loans with low downpayments will have strong compensating factors. The rule does contain a temporary exemption from the DTI requirement for loans eligible for purchase, guarantee or insurance by federal government agencies or the
GSEs. These agencies’ underwriting engines incorporate compensating factors.
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The risk retention rule is designed to protect investors by ensuring that issuers stand behind the products they are securitizing, and would require issuers of MBS backed by loans falling outside an established safe definition to retain 5% of the risk associated with those loans.
Dodd-Frank created the QRM as an exemption from risk retention for loans that are well underwritten, fully documented and that do not contain risky loan features (negative amortization, payment shock, etc.). Not knowing what exactly the QM rules would say, Dodd Frank required that this definition be no broader than the credit box established under the QM rule
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Harmonizing the two rules, i.e. making the QRM standards equal to the
QM standards, will ensure that safe and sound lending protections are put in place, but without unduly restricting the housing market from efficiently accessing private capital. Failure to synchronize these rules will entrench the market’s current dependence on government-backed lending as privatemarket mortgages will be more expensive.
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Existing loans that meet the QM requirements have performed extremely well, even through the recent financial crisis.
Moreover, the safe harbor provided by the final QM rule applies only to loans whose APR is less than
150 basis points above the Average Prime Offer Rate. This restriction means that QM loans cannot have significant risk, and will ensure that QM loans with high LTVs will have strong compensating factors.
Citation: Roberto Quercia, Lei Ding, and Carolina Reid (2012). "Balancing Risk and Access: Underwriting Standards for
Qualified Residential Mortgages," UNC Center for Community Capital Research Report, January 2012. This analysis utilized the QM product restrictions but not the DTI restriction.
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Various estimates indicate that non-QRM loans will be significantly more expensive than QRM loans.
Citation: Moody’s Analytics, ASF, Morgan Stanley, Amherst, NAR, MBA.
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The QRM rule falls hardest on everyday Americans, with first-time homebuyers and families of color being especially impacted. The dream of homeownership will become a mirage for many would-be homebuyers, despite their ability to obtain a safe and affordable QM loan.
* Note: CRL Calculations based on 2010 ACS and BLS median Income. Calculations include years required to save for downpayment and closing costs.
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Citation: Roberto Quercia, Lei Ding, and Carolina Reid (2012). "Balancing Risk and Access: Underwriting Standards for Qualified Residential Mortgages,"
UNC Center for Community Capital Research Report, January 2012.
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Risk retention based in large part on downpayment requirements is not necessary for loans that fall within the QM credit box in light of the significant safety features imposed on mortgages via the final rule.
Downpayment
Imposing a downpayment requirement of 10% will require risk retention for 31% of the QM-eligible market, or else channel these loans through government sources via the carve-out provided for the GSEs and the FHA.
Following the proposed QRM rule and imposing a downpayment requirement of 20% would require risk retention for
61% of the QM-eligible market, resulting in higher costs to borrowers and increasing government involvement in housing.
Citation: Roberto Quercia, Lei Ding, and Carolina Reid (2012). "Balancing Risk and Access: Underwriting Standards for
Qualified Residential Mortgages," UNC Center for Community Capital Research Report, January 2012. This analysis utilized the QM product restrictions but not the DTI restriction.
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The QRM exemption for loans secured or insured by the federal government will channel the market toward government-backed loans, going against the stated policy goals of Congressional leaders, Administration officials and both industry and consumer advocates, to reduce the government’s footprint.
Source: NAR analysis of LPS data
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• QRM was conceived to protect MBS investors against poor underwriting, sloppy or non-existent documentation, and toxic mortgage products
(2/28s, Neg Am) that often went undisclosed.
• QM has reformed the mortgage market in such a way as to ensure that borrowers can afford to repay their mortgages using reasonable debt-toincome ratios, by requiring full documentation of income and assets and by eliminating many risky loan features, thereby reducing the risk of default.
• Although designed for a different purpose, the QM addresses the same risks that gave rise to the QRM. The result of CFPB’s work is that loans that meet QM standards will also be safe for investors, and securities based on these loans will be transparent for them.
• Thus, to protect investors, safeguard consumers, and preserve continued access to affordable mortgage credit, the QRM should equal the QM.
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