QRM: Is the Pendulum Swinging Back Too Hard?
There is no doubt that one of the main reasons for the housing collapse was that mortgage underwriting became too lenient. It seemed anyone who wanted to purchase a home found someone to give them a mortgage; whether they actually qualified for it or not. These buyers eventually couldn’t make their monthly mortgage payment and many went into foreclosure.
This started the downward spiral in home values which crashed our economy.The government is now calling for adjustments to the definition of a “Qualified Residential Mortgage” (QRM) in order to guarantee this never happens again. Like many adjustments that follow a disaster, some are claiming the pendulum is swinging back much too hard. Let’s look at the requirements being considered.
The FHFA issued a Mortgage Market Note 11-02 last week which discusses QRM. Here are the highlights:
Types of mortgages that will qualify
A Product-Type qualified residential mortgage is a first-lien mortgage that is for an owner-occupant with fully documented income, fully amortizing with a maturity that does not exceed 30 years and, in the case of adjustable rate mortgages (ARMs), has an interest rate reset limit of 2 percent annually and a limit of 6 percent over the life of the loan.
Therefore, the following loans WILL NOT qualify:
- Alt-A (most of which are low or no document) mortgages
- Interest-only mortgages
- Negatively amortizing mortgages such as payment option-ARMs
- Balloon mortgages
Acceptable debt ratios
A PTI/DTI qualified residential mortgage has a borrower’s ratio of monthly housing debt to monthly gross income that does not exceed 28 percent and a borrower’s total monthly debt to monthly gross income that does not exceed 36 percent.
Payment-to-income ratio, otherwise known as front-end DTI, is the sum of the borrowers’ monthly payment for principal, interest, taxes, and insurance divided by the total gross monthly income of all borrowers as determined at the time of origination. Debt-to-Income ratio, or back-end DTI, is similar to payment-to-income but adds all other fixed debts into the numerator of the ratio.
Down payment requirement
An LTV ratio qualified residential mortgage must meet a minimum LTV ratio that varies according to the purpose for which the mortgage was originated.
For home purchase mortgages, the LTV ratio will be 80% which means a buyer would need a 20% down payment.
Necessary FICO score
A FICO qualified residential mortgage has a borrower’s FICO score greater than or equal to 690 at the origination of the loan. The HLP dataset does not record delinquency history, prior bankruptcy of foreclosure, etc. of borrowers in the loans analyzed. For this reason, using a threshold of 690 for the FICO of the borrower at origination is a proxy for the absent detailed credit bureau data.
How many existing loans would pass QRM?
According to the FHFA report, less than half the loans originated over the last 12 years would have qualified. Here are the percentages that would have qualified based on the year the loan was originated:
- 1997 – 20.4%
- 1998 – 23.3%
- 1999 – 19.5%
- 2000 – 16.4%
- 2001 – 19.4%
- 2002 – 22.4%
- 2003 – 24.6%
- 2004 – 17%
- 2005 – 14.4%
- 2006 – 11.5%
- 2007 – 10.7%
- 2008 – 17.4%
- 2009 – 30.5%
We understand that the loans written during the years building up to the bubble were not scrutinized appropriately. However, it seems strange that only 20.4% of the loans issued in 1997 would meet the new criteria.
When will this take place?
We want to make two things very clear right now:
- These are proposed adjustments which are currently up for debate.
- Whatever is approved will only apply to government backed mortgages. The private sector will still be allowed to lend their money based on their own criteria (ex. 10% down payments).
However, there will be increased costs to lending institutions which do not use the QRM. Those costs will be transferred on to the purchaser.
What might these increased costs amount to?
Cameron Findlay, chief economist for LendingTree, in an article on the ramifications of QRM explained:
Homeowners who do not qualify for a loan that meets the new definition (mortgage insurance doesn’t appear to be part of the equation) would be forced to pay substantially higher rates. Early market estimates place that number as much as 3.00% higher than the QRM equivalent rate (on a $200,000 loan, that’s almost $400 more a month).
Others like housing economist Tom Lawler do not see the impact being as severe.
Bottom Line
Loan qualifications will continue to get tougher and the costs of a mortgage will increase. Perhaps now is the time to buy that house of your dreams.
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These new ‘rules’ if passed, will totally bring down the economy to a frightening low level. In my opinion it would be similar to clogging the wheels of progress and then scratching one’s head in bewilderment. It will destroy the middle incomes dreams of owning a home; leave no option for a lower income family to rise above their ‘station’. And of course the builders, painters, electricians, plumbers, and other service oriented folks can join the ranks of the unemployed. The rich of course will feel no pain. They can invest in rental properties and watch the world from their ivory towers. What a disturbing vision for me. I certainly hope this is just a nightmare and will never reach reality.
Diane, for a minute let’s be realistic: if you were the one loaning your money to someone, how easy would you make it for them to walk away from the loan.
Maybe in the future it would be smart to allow brokerages to loan more money, and make them keep some of the risk associated with the loan…as they want to do with the banks. We can no longer have all the benefits without sharing the risk. It’s great that we want to push our views, but maybe it’s time we have to put our money where our mouth is. Then we’ll see how many loans realtors write.
Jumbo loans/ Full Doc cash out limit is 60%- What a joke
OMG! What a bunch of crap!!! First of all the banks made out like pirates who raped and pillaged the American people. Idiots!!! Let’s punish the victim/homeowner… First the banks farm out their mortgages to brokers telling them to give anyone who wants a mortgage on an ARM or IOM to give them one. Hell they had people out on the streets with signs that read ”Don’t Rent, Buy!” Hell they even had what were called liars mortgages!
The banks got paid premium mortgages for 3-5 years and then some super premium mortgages after ARM took affect for a short period afterwards. Then the banks foreclosed on the homes, got the homes back then sold them at short sale or auction. Then the banks claimed a loss on the bad note and didn’t pay any gains… Then the banks got a “Government Bailout” which actually came from the people they took the homes from… (Our US Tax Dollars with no stipulations on it!). So the banks turn around and buy a new or existing bank (With the people’s money whom they just robbed) and all of its “Bad Debt” and end up with the homes again!!! (The banks made money 5 times on 1 property) Not to mention that a majority of these foreclosures were “Mortgage Backed Securities” by tax payer (Americans People’s) money. (FHA, HUD, VA, Freddie Mac, Fannie Mae, and USDA)… Makes one wonder if the there is “Collusion” going on here… Sure looks like it and most Americans are blind to it until after the matter; when the try and sneak some bull like this into law when no one’s looking or paying attention.
Now the Government is going to punish the victims (American People) again buy not making it easier to buy another home??? The banks are going to get free reign to rake us over the coals again. Sounds like the Government wants to draw a canyon not a line between the rich and the poor! So only the rich can own property and rent to the poor and only the rich can benefit from the tax benefits that come with owning a home. I will have to look at what the new tax codes look like that they released on February 12th 20111???
Either Government is getting into “Banking” or the banks are getting into the “Real Estate Business”… I feel bad for the people that don’t know the loopholes I do. Fortunately for me this will not affect me a bit and never will unless we become a communist country… I guess I need to publish a book now and get a TV commercial LOL!
You nailed it on the head Diane!
Dennis Robinson
This loan structuring is very much like the requirements of 25 years ago. That was a time when we, as agents, qualified our buyers with a written financial profile requirement and the 28% and 36% debt ratios done by us as Realtors, before we would put them in our car. And gas wasn’t at the price it is today. We just need to learn to think like lenders and pre-qualify again. Don’t be afraid of asking the Financial questions. It’s not rude, and it IS your business, if you plan to invest time and money in showing houses.
These only apply to government-backed mortgages. Hopefully this will encourage more banks to do more lending in-house. If instead of selling their mortgages to some government body, they have to swallow the loss when a borrower can’t make good, they will be more likely to offer borrowers terms they can afford and steer borrowers toward houses that are in a suitable budget range.