Will the forthcoming Qualified Residential Mortgage (QRM) requirements affect future home sales volume?

  • Yes. (93%, 75 Votes)
  • No. (7%, 6 Votes)

Total Voters: 81

The Federal Housing Administration (FHA) reports its reserve fund is at -1.44% (or negative $16.3 billion), down from 0.24% in 2011. FHA will need a bailout for the first time in its history if its reserves are still negative in November 2013.

The FHA isn’t taking this lying down. Measures to take the FHA back into the black include:

  • extending premium payments for new loans beyond the current ten-year maximum; and
  • increasing annual insurance premiums on new loans by 0.1%.

It also plans to increase foreclosure efficiency and avoid costly foreclosures by:

  • continuing to sell pools of defaulted mortgages to investors (at least 10,000 mortgages per quarter);
  • allowing deeper levels of payment relief for distressed homeowners; and
  • allowing more short sales.

The 2012 reserve requirement set by Congress is 2%. Reserves dipped into the negative due to:

  • a lower home price appreciation than forecast;
  • declining interest rates, meaning more creditworthy homeowners have refinanced into non-FHA mortgages, paying off their FHA mortgages; and
  • high losses on loans originated from 2007-2009, the recession years.

first tuesday insight

The bailout is more than just likely. The FHA is the kingpin that currently holds the entire housing market together. It is indeed too big to fail, necessary for around one-third of California’s monthly home sales.

The qualified residential mortgage (QRM) guidelines, set to take effect in early 2013, require a 20% down payment. (FHA-insured mortgages are not subject to QRM guidelines.)

Currently, more than half of the current homebuyer population puts down less than 20% when purchasing a home. With a 20% QRM restriction, these low down payment buyers will have two options:

  • pay the increased interest rates on a non-QRM loan AND purchase expensive private mortgage insurance; or
  • take out a Federal Housing Administration (FHA)-insured loan.

Most borrowers will opt for the FHA-insured loan.

With the personal savings rate now below 4%, very few homebuyers will be able to produce a 20% down payment within the next 10 to 15 years. The QRM will create a more stable housing market in the long run, but homebuyers need time to adjust to the new (well, old) norm of a 20% down payment. Thus, the FHA’s rising dominance as the low down payment option is necessary to keep deals churning.

Related article:

The 20% solution: personal savings rates and homeownership

But personal savings are low partly because of the low down payment requirements of FHA-insured mortgages. Not only is low savings bad for stable homeownership, it’s bad for stable household balance sheets.

So, the FHA’s got a delicate juggling act ahead of it. On one hand, it must keep deals moving forward, and balance future QRM requirements. On the other, it must eventually wean homebuyers off the low down payment option so the QRM can stabilize the market.

And up in the air? Its own solvency.

Re: FHA issues annual financial status report to Congress from the U.S. Department of Housing and Urban Development, FHA projected to exhaust reserves, could need bailout from the Los Angeles Times and FHA running out of money from the Washington Post