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What Impact Will QRM Have on Housing Demand?

The federal government would like to dramatically decrease their role in the financing of residential real estate. To that goal, they have proposed the guidelines for a ‘Qualified Residential Mortgage’ (QRM). How would these proposed guidelines impact the demand for housing? Here is what three different entities are reporting:

CoreLogic

“Roughly 39% of homebuyers in 2010 made a downpayment of less than 20%, loans that may not have been made had the current risk-retention proposal been in place, according to data from CoreLogic.”

The National Foundation for Credit Counseling (NFCC)

The NFCC is the nation’s largest and longest-serving national nonprofit credit counseling network, with nearly 100 Member Agencies and more than 800 offices in communities throughout the United States and Puerto Rico. In a recent survey 50% claimed:

they would never be able to save enough money for a down-payment.

The Federal Government Itself

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.

Bottom Line

QRM just doesn’t make sense.


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5 replies
  1. Brian
    Brian says:

    It should read “The American People;” we are in fact the financiers for the government through unrepresented taxations. Once The Government quits using our money to finance home purchases you will see the crash get another leg up.
    The sooner Real Estate Agents and Mortgage Professionals realize that mortgage financing doesn’t conform to what they think makes sense and begin to look at a broader reality the sooner you can write a reasonable business plan with expectations for success.
    No financing options exist. Any entity with the capitol to invest in mortgages, understand the underlying fundamentals that effect housing today and well into the next decade. They will require large down payments and interest rates well into the 7-8% range. This is why private investors have fled.
    I ask you, if you had 10 million dollars would you finance a stranger’s home at 3% down with a 5% interest rate. If you answered yes, that is one of many reasons why you don’t have 10 million dollars, and you’ll have to put on your thinking cap.
    Regionally we will see some variation; however the following apply and Americans are delusionally optimistic and a people of false hope waiting for a miracle. I teach my eleven year old son that the world does not conform to or care about how you feel, it operates on facts, a lesson that serves him well when he’s faced with harsh realities.
    Housing prices will ultimately reflect 2.5 time’s household income; or less. When that standard was implemented almost a century ago we didn’t have the level of taxation we have today, the number of household bills and expenses; pay TV, multiple cell phones in every home, rising utility costs, high cost insurance, over priced automobiles, and on and on the list goes, the intentional depreciation of the dollar enacted by the Fed in the form of inflation. They depreciate our currency in order to ease the MASSIVE debts owed to other countries. This is how they pay-off that debt. They cause it to lose value making it easier to pay-off. This erodes you purchasing power as well. Which certainly you have noticed; and yes it effects housing too.
    College graduates go into massive debt and enter a low wage job market. Median starting salary for the class of 2010 is $27,000, student loan debt soaring while wages decline and delay a generation from buying homes. This stat alone is frightening and sobering.
    Approximately 20 million former home owners now have bad credit, for not paying their mortgage equals 20 million less buyers. Appraisal standards will not be changed to accommodate rapid appreciation. The loan programs that allowed people to qualify won’t return.
    Looking at the growth of lower paying jobs, and non-existent growth of real paying jobs, outsourcing, and the effects of NAFTA, baby boomers retiring, and the massive amount of excess housing inventory; I ask you where does the recovery come from.
    Buyers beware; check the medium income per home for your area before you buy and don’t pay more than 2 times. This will be a very good gauge as to whether or not you are making a wise purchase decision. I realize this is generalization, but; taking everything in context and applying historical facts combined with current events, paying anything more is just risky. Mark my words this is where housing values will eventually settle.
    For those planning to sell you better do so before they lift the Mortgage Debt Relief Act or you’ll end up in bed with the IRS.
    For those who still see this as your calling you are brave and hardy souls, you continue to weather a relentless storm with no light on the horizon, if you have lasted this long you obviously have accepted the new reality and have my respect. Soldier on!!

    Reply
  2. David Mott
    David Mott says:

    Brian,
    re: “Buyers beware; check the medium income per home for your area before you buy and don’t pay more than 2 times. This will be a very good gauge as to whether or not you are making a wise purchase decision.”

    In my opinion, if the appraisal process included the actual cost to build the house (adjusting for improvements or wear and tear), we would be left with the value of the lot. The value of the lot (location) is the biggest variable.

    If I were going to loan money on a home, I’d first want to know what the replacement value would cost, then I’d consider the location. If the appraisal process ended up costing more to reduce market price fluctuation (like just using MLS data), then perhaps the down payment requirement might be reduced (disclaimer: I’m not an appraiser).

    It seems to me that there is a mindset with some that paying rent every month is fine, but they can’t justify paying the same amount a month to ‘own’. Once the check is mailed, the money disappears.

    It’s too easy to generalize when the media is (over) generalizing too.

    Perhaps “do your homework, but buy what one can afford” might be better advice?

    Regards,
    David Mott

    Reply
  3. Rob Rule
    Rob Rule says:

    Brian:

    WOW…someone woke up on the wrong side of the apocalypse today! The price of real estate is dictated by one thing – supply and demand. There will ALWAYS be regions where demand outstrips supply, and the cost will exceed the the 2.5/1 ratio that you prescribe. Yes, buyers should beware in those situations, but as long as they plan appropriately, it is possible to buy in those markets without getting hurt – you just have to have an exit plan that allows you to either remain in the home during the downturn, or turn it into an income-producing property for you when you DO move out.

    As to your question about “if you had 10 million dollars would you finance a stranger’s home at 3% down with a 5% interest rate” – it happens all the time, but it’s on a far larger scale than you present. The entities that buy MBS’s don’t have 10 million; they are pension funds that have 10 BILLION, and the sheer scope of resources that they command demand that they are simply looking for a reasonably safe place to park their money and earn a conservative ROI. Much of that money has fled the marketplace for now, but once the rules have been re-established and it looks profitable, that money will come back in droves. The question especially for foreign investors is: where else is safer than the US housing market? Gold? Over the past 30 years gold has been a loser when adjusted for inflation, while housing has increased – and that includes the developments of the past decade on both sectors. Oil? Uhhh, no. One look at the Middle East would scare any reasonably cautious investor out of the region forever. How about Japanese companies? European conglomerates? African natural resources? No, no, and no.

    You are very astute in noting the depredations of our government on our currency, but the end result of inflation is that assets like real estate benefit, not suffer, from its effects. The worn but true axiom about buying real estate because they ain’t making any more of it is especially true.

    Simply put, the recovery comes from the next generation. By “the next generation”, I mean specifically Generation Y, which is now larger than the Baby Boomers in size and entering the age of the typical first time homebuyer (30). Yes, jobs pay less than they did. But those retiring Boomers are sitting on a mountain of cash, and if they are watching what is happening in Washington today, they likely realize that when they die a larger chunk of that wealth will be transferring to the government instead of their heirs – so they are more likely to assist in things like home purchases for their children and grandchildren while they are alive and can gain the satisfaction of seeing the benefits of those gifts with their own eyes.

    Ultimately, it is incumbent upon us to force our government to pay attention to the crisis, to act in a fiscally conservative manner, and to support prudent lending initiatives that make homeownership available to those that behave responsibly. And that’s why it is so important for all of us to be taking an active part in communicating with our legislators about wrongheaded initiatives like QRM. Just as a doctor doesn’t perform a lobotomy on a person who has a cold, we cannot let our government swing the pendulum so far to the other side that even responsible buyers cannot buy a home.

    Reply
  4. Brian
    Brian says:

    The value of a home when the dust has settled, will be determined by those that lend the money; period. Not the market conditions you referenced.
    Their tollerance will not be more than the same safe, succesful, performance standard set in place decades ago; 2.5% max household income.
    Your facts simply support a theory.
    I do agree something has to give. You can bet it won’t be those finacing the “New World”
    Believe me I’ve done my homeowork, and it applies to the lesson appropriately.
    Again put yourself in the shoes of the Lender; they dictate the terms, not market variables.

    Lets revisit this issue in two years and see who got it right.

    In the mean time Soldier on!!!

    Reply

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