Editor: David Reiss
Brooklyn Law School

October 21, 2013

Access to Sustainable Credit

By David Reiss

Reid & Quercia have posted Risk, Access and the QRM Reproposal. This document is intended to influence the most recent proposed rulemaking for the Qualified Residential Mortgages (QRMs). The rulemaking process for the QRM has been controversial and the stakes could not be higher for the health of the residential mortgage market. The first  proposed rulemaking in 2011 would have required QRMs to have substantial down payments. A broad coalition of lenders and consumer groups believed that this requirement would excessively restrict credit and so the regulators responsible for the QRM rule issued an new proposed rulemaking in 2013 that removed the requirement for down payments from the QRM definition.

Reid & Quercia argue that the more restrictive 2011 proposed QRM rule only provided marginal benefits over the 2013 proposed QRM rule, while significantly restricting credit particularly for households of color. They note that the “objective of weighing the marginal benefit of stricter QRM requirements against the costs of cutting off access to the mainstream mortgage market is an important one.” (7) They have created simple metrics “for evaluating the tradeoffs of reducing the number of defaults against the number of successful borrowers who would not be able to obtain a QRM loan as a result of stricter down payment and credit score requirements” (7)

While Reid & Quercia do not say so explicitly, I believe that their metrics, such as the benefit ratio, should be explicitly worked into the final QRM rule so that regulators are constantly considering the two sides of credit: availability and sustainability. There is a lot of pressure to increase access to residential mortgage credit by a range of players — consumer advocates, lenders and politicians to name just a few. But credit that cannot be sustained by homeowners leads to mortgage default and foreclosure. We will be doing new homeowners no favors by letting them take out mortgages with payments that they cannot consistently make, year in and year out.


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