Tag Archives: Housing and Urban Development

Qualified Residential Mortgage Comments

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The agencies responsible for the Qualified Residential Mortgage rules that address the issue of credit risk retention for mortgage-backed securities requested that comments on the proposed rulemaking be submitted by yesterday.  And comments there were.  Here is a sampling:

The Urban Institute argues that

In formulating their QRM recommendations, the Agencies have done an admirable job balancing these considerations: on one hand, they wanted QRM loans to have a low default rate; on the other hand, if QRM is too tight, it will impede efforts to bring private capital back into the market and will further restrict credit availability. The right balance would thus appear to be precisely where they have landed with their main proposal: that QRM equal QM. (2)

The Securities Industry and Financial Markets Association effectively agrees with this and argues that

QM should be adopted as the standard for QRM, rather than QM-plus. QM is a meaningful standard for high quality loans. The characteristics of QM-plus, particularly the 70 percent LTV ratio, would exclude most borrowers from these loans. We believe the adoption of QM-plus would reduce the competitiveness of private mortgage originators and delay the transition of the housing finance system away from the GSEs. (vi)

The American Enterprise Institute, on the other hand, argues that

The preferred response, in our opinion, is to implement the Dodd-Frank Act by creating a combination of the QM and a standard for a traditional prime mortgage that Congress intended for the QRM. For this reason, we have filed this comment with the agencies, detailing how it is possible to comply with the clear language and intent of the act and still provide a flexible set of standards for prime mortgages — which have low credit risk even under stress. (4)

My thoughts on the proposed QRM rule can be found here, here, here and here.

If QRM = QM, then FICO+CLTV > DTI ?@#?!?

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The long awaited Proposed Rule that addresses the definition of Qualified Residential Mortgages has finally been released, with comments due by October 30th. The Proposed Rule’s preferred definition of a QRM is the same as a Qualified Mortgage. There is going to be a lot of comments on this proposed rule because it indicates that a QRM will not require a down payment. This is a far cry from the 20 percent down payment required by the previous proposed rule (the 20011 Proposed Rule).

There is a lot to digest in the Proposed Rule. For today’s post, I will limit myself to a staff report from the SEC, Qualified Residential Mortgage: Background Data Analysis on Credit Risk Retention, that was issued a couple of days ago about the more restrictive definition of QRM contained in the 2011 Proposed Rule.  The report’s main findings included

  • Historical loans meeting the 2011 proposed QRM definition have significantly lower SDQ [serious delinquency] rates than historical loans meeting the QM definition, but applying this definition results in significantly lower loan volume than QM.
  • FICO and combined loan-to-value (CLTV) are strong determinants of historical loan performance, while the effect of debt-to-income (DTI) is much lower.
  • Adding FICO or CLTV restrictions to the QM definition reduces SDQ rates faster than the loss of loan volume: max ratios achieved at 760 FICO and 55% CLTV. (2)

Certainly, some readers’ eyes have glazed over by now, but this is important stuff and it embodies an important debate about underwriting.  Is it better to have an easy to understand heuristic like a down payment requirement? Or is it better to have a sophisticated approach to underwriting which looks at the layering of risks like credit score, loan to value ratio, debt to income ratio and other factors?

The first approach is hard to game by homeowners, lenders and politicians seeking to be “pro-homeowner.” But it can result in less than the optimal amount of credit being made available to potential homeowners because it may exclude those homeowners who do not present an unreasonable risk of default but who do not have the resources to put together a significant down payment.

The second approach is easier to game by lenders looking to increase market share and politicians who put pressure on regulated financial institutions to expand access to credit. But it can come closer to providing the optimal amount of credit, balancing the risk of default against the opportunity to become a homeowner.

It would be interesting if the final definition of QRM were able to encompass both of these approaches somehow, so that we can see how they perform against each other.