Major changes likely to ‘qualified residential mortgage’ proposal

Do you hear us now?

No hardwired mortgage down payment requirements for well-qualified homebuyers. Not 20 percent. Not 10 percent. Not 5 percent.

That’s what an unprecedented alliance of dozens of civil rights, real estate, labor, mortgage and consumer advocacy groups — joined by substantial percentages of the membership of Congress — have been shouting at six federal agencies, in a steadily rising pitch, for the past two weeks.

Their objective: convince officials to change their minds about the controversial “QRM” (qualified residential mortgage) proposal that would mandate 20 percent down payments and strict debt-to-income rules.

The U.S. Federal Reserve today announced an extension of the comment period for the proposal, also known as the “credit risk retention requirements,” to Aug. 1, 2011. The original public comment deadlines was June 10, 2011.

Though the regulatory agencies are prohibited by law from discussing the proposal while it is still open to public comment, industry sources say the rule writers are getting the message and will ultimately back down in their final QRM plan.

If they don’t back down enough, however, say sources on Capitol Hill, Democrats and Republicans in the Senate and House are prepared to force them to do so with corrective legislation.

Last week, bipartisan groups of 160-plus members of the House of Representatives and 40 members of the Senate wrote to the six agencies — the FDIC, SEC, HUD, the Office of the Comptroller of the Currency, the Federal Housing Finance Agency and the Federal Reserve — urging them to focus on sound underwriting, safe loan products, and borrowers’ ability to repay, plus full documentation — not down payments.

The three authors of the QRM section of the Dodd-Frank law — Sens. Kay Hagen (D-N.C.), Johnny Isakson (R-Ga.) and Mary Landrieu (D-La.) — called the agencies’ pending proposal “extreme” and directly contradictory to congressional intent.

Rather than the broad set of common-sense standards needed to stabilize the mortgage and housing markets in the wake of the excesses of the housing bust, they wrote, “regulators crafted a narrow definition (of what constitutes a safe loan) that could unnecessarily slow the housing recovery, increase costs to otherwise qualified homebuyers, and dampen incentives for sound underwriting.”

The proposed QRM standard would push nearly a third of American borrowers out of the market, the senators estimated — especially first-time home purchasers, minorities and moderate-income families.

Real estate and mortgage data firm CoreLogic offered an even higher estimate: 39 percent of homebuyers in 2010 made a down payment of less than 20 percent. That would have made them ineligible for a loan that meets the proposed QRM standard. Or it would have forced them to pay as much as 3 percent higher interest rates for a “nonqualified” mortgage.

The QRM section of the Dodd-Frank law requires loan originators to retain at least a 5 percent interest in mortgage securitization pools to give them “skin in the game,” unless the underlying loans meet a national standard for low-risk mortgages.

Dodd-Frank instructed federal regulators to devise a standard using criteria such as loan structures (no balloons, no negative amortization, no pick-a-pay, and no interest-only loans), plus verification of the borrower’s ability to repay, full documentation, and credit enhancements (such as private mortgage insurance).

The law made no reference to down payments — an omission, said the three senators, that was intentional.

The QRM issue has spawned a rare birds-of-different-feathers spectacle on Capitol Hill. Interest groups that often are antagonistic, or pursue sharply different lobbying agendas, have come together to fight the six agencies.

It’s unusual to see the Service Employees International Union, the AFL-CIO, NAACP, National Council of La Raza, the National Association of Consumer Advocates, and the National Consumer Law Center march arm in arm in solidarity with bankers, homebuilders, mortgage lenders, real estate agents and brokers, title companies and mortgage insurers.

But the potentially severe impacts that QRM, if adopted in current form, would have on homeownership opportunities and the broader marketplace, including employment, has brought the groups together to fight the proposed standard, at least for now.

The political implications of such an alliance in a pre-election year cannot have gone unnoticed at the White House. Regulators “are screwing Obama’s core supporters,” said one lobbyist who asked not to be identified because he is not authorized to speak for his trade group. “They can’t just come back and say, ‘Alright, alright, we’ll compromise and go with a 10 percent down payment. That won’t cut it.”

Because of the heavy bipartisan congressional involvement and the demand by QRM’s Senate authors to follow their expressed intent in the legislation to the letter, any type of minimum down payment requirement in the final rule may no longer be acceptable to key members of the alliance.

One prominent trade group official said, “We’ve gone beyond that. If they come back with anything with a down payment in it, you’re going to see a move in Congress to step in again” and amend the law to specifically prohibit down payment criteria as part of the final standard.

By Ken Harney, Tuesday, June 7, 2011.

Inman News™

Ken Harney writes an award-winning, nationally syndicated column, “The Nation’s Housing,” and is the author of two books on real estate and mortgage finance.

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