The Quality Residential Mortgage (QRM), a proposal by the government to tighten lending standards, has initiated quite a debate. The government feels strongly that standards must be raised while others have debated that the new guidelines are an example of the pendulum swinging back much too far. For the government's position on QRM, click here. For the other side of the debate, click here. We do not want to enter this debate today. Instead, we just want to shed some light on the increased cost a buyer should expect under the new guidelines. The fact that it will cost a purchaser more is not argued by either side. The only question is the extent of the increase. The most complete study we could find on this issue was JP Morgan's 55 page report on Securitized Products. According to their research, in order to entice lending institutions to replace government lending, mortgage interest rates could increase 3%.
"...in this new world of higher capital requirements, mortgage rates would need to rise by more than 300 basis points (3%) from current levels..."That's assuming the banks would be looking for the same returns they normally receive. The report went on to say that perhaps the banks would be satisfied with a smaller return.
"This is not to say that the new capital requirements will necessarily drive interest rates 3% higher...the mortgage rate impact could be anywhere from 1% to 3% higher."Let's assume the eventual increase in mortgage rate is 2% (the middle of that 1% - 3% window). What impact would that have on a purchaser? Today, interest rates are approximately 4.5%. A two percent increase would bring them to 6.5% which happens to be about where they were prior to government intervention. On a $200,000 mortgage, a buyer's monthly mortgage payment (principle and interest) would go from $1,013.37/month to $1,264.14/month. That is an additional $3,009 each year and a total of $90,277 over 30 years.