QRM rules finalized — and little has changed

The long-awaited qualified residential mortgage (QRM) rules have been finalized by the six federal agencies charged with implementing the Dodd–Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank).

The rules align with the qualified mortgage (QM) rules recently published in 2013, explained in more detail here. Most significantly, there is no down payment percentage requirement attached to the QRM.

To qualify as a QRM, the mortgage needs to meet the following standards:

• have regular, roughly equal periodic payments;
• not allow for negative amortization, interest-only or final/balloon payment features;
• have a term of 30 years or less;
• provide for total points and fees not to exceed 3% of the mortgage amount;
• when underwriting the loan, the lender is to take into account the monthly payment for any mortgage-related obligations using the maximum interest rate that may apply during the first five years after the first regular periodic payment is due;
• consideration and verification of the consumer’s income and assets; and
• a total back-end debt-to-income (DTI) ratio that does not exceed 43%. [12 Code of Federal Regulations 1026.43(e)(2)]

These rules are scheduled to take effect for residential mortgages one year from the date of publication in the Federal Register.

Any changes made by the Consumer Financial Protection Bureau (CFPB) to the QM definition are automatically applied to the QRM.

For “skin in the game,” lenders that originate residential mortgages which do not follow the QRM rules must retain at least 5% of the non-qualified mortgages they sell on the secondary mortgage market (a process called securitization).

Excluding a down payment requirement is a big miss for the QRM. The federal agencies charged with implementing Dodd-Frank reason a 20% down payment requirement restricts mortgage access for low- and moderate-income homebuyers. However, any down payment below 20% requires the added expense of private mortgage insurance (PMI), inflating the borrower’s overall borrowing costs.

However, it appears the agencies’ approach was to qualify as many mortgages as QRMs, rather than actually making any changes in the mortgage market. Or, in their words, their aim was “reducing regulatory burden.” Thus, more mortgages will be originated, but this comes at a steep price: lower principal amounts due to PMI on low down payments otherwise increasing the monthly payments significantly to cover the risk of increased defaults.

Imposing a down payment requirement was sure to have decreased mortgage originations at the start, but it would have meant a more stable housing market over the long-term cycles of boom and bust. Short-term discomfort for long-term stability. That’s because homeowners with larger down payments automatically have more invested in homeownership—more skin in the game—which deters them from walking away whenever home values take a turn for the worse.

Alternatively, the agencies could have imposed a graduated down payment requirement which increases over numerous years, giving time for homebuyers to adjust and reacclimatize. However, it’s more of the same for now, until the next big housing bust and regulators are forced to publically reconsider enacting mortgage fundamentals.

The agencies are scheduled to review the QRM definition again four years after the QRM becomes effective. We’ll see if it grows anymore teeth.