By David A. Wolfe, Esq.
In the wake of the 2008 financial crisis, mortgage lending is currently undergoing a major legislative overhaul. The purpose of the increased regulation is to create strong incentives for responsible lending and borrowing and to help borrowers get home loans that are less likely to result in hardship or default, which will most certainly have the added effect of increasing costs to borrowers.
The Dodd-Frank Financial Reform Bill requires mortgage lenders to retain a 5 percent share of each loan they originate, but Qualified Residential Mortgages (QRMs) will be exempt from the new risk-retention rules. The legislation specifically identified loans guaranteed or originated by FHA, VA, and USDA as qualified for exemption but left other products, including loans written by Fannie Mae and Freddie Mac, up to federal regulators to determine. A joint effort between six federal agencies, including the Department of Housing and Urban Development, Federal Deposit Insurance Corp., Federal Housing Finance Agency, Federal Reserve, Office of the Comptroller of the Currency, and the U.S. Securities and Exchange Commission, the QRM definition is of great importance because it will determine the types of mortgages that will be generally available for borrowers in the foreseeable future.
The current QRM definition proposed at the end of March would require an 80% or less loan-to-value, (at least a 20% down payment); limiting the mortgage payment to 28% of gross income and all debts to 36%. Further, while no credit score requirement is included, a mortgage loan would qualify as a QRM only if the borrower is not currently 30 or more days past due on any debt obligation; borrowers could not have been 60 or more days past due on any debt obligation within the preceding 24 months; and during the preceding 36 months borrowers could not have been through bankruptcy, foreclosure, engaged in a short sale or deed-in-lieu of foreclosure, or subject to a Federal or State judgment for collection of any unpaid debt. The proposed definition is subject to public comment through June 10, 2011, and will then be reviewed by Congress.
In a recent speech, Federal Reserve Chairman Benjamin Bernanke urged lawmakers to avoid “imposition of ineffective or burdensome rules that lead to excessive increases in costs or unnecessary restrictions in the supply of credit.” However, a restrictive QRM definition will work against homeowners. The longest recession since the Great Depression has been the cause of high unemployment and under-employment, leading a high debt-to-income ratio for many borrowers and devastated credit scores. These factors combined with falling property values will prevent many U.S. homeowners from refinancing into a QRM. Without the ability to secure a 20% down payment, the capital reserve retention rules will subject borrowers to higher costs for the additional risk and will combine with higher mortgage rates for many to add additional roadblocks to sustainable home ownership, especially those in the hardest hit areas of the country.
David A. Wolfe is an associate in Consumer Collections who practices within the Consumer Collections, Corporate & Financial Services, Credit Union, Collateral Recovery/Replevin and Litigation & Defense Groups of Weltman, Weinberg & Reis Co., LPA. He is based in the Detroit office and can be reached at 248.362.6142 or email@example.com.