There are two types of mortgages covered in the Dodd-Frank Act, and both are going to impact the housing market. Those two mortgages, QMs and QRMs, meet very different requirements, and the American Securitization Forum wants to make sure that Federal regulators enforce that.
The American Securitization Forum submitted a comment letter to the Consumer Financial Protection Bureau that stressed the importance of the proposed rulemaking in establishing “qualified mortgage” standards, QMs, that are markedly different from what constitutes a “qualified residential mortgage,” QRMs.
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What are QMs (qualified mortgages) and QRMs (qualified residential mortgages)?
A QM is a Dodd-Frank Act requirement that lenders make a reasonable determination when offering a QM mortgage loan that a consumer can repay a mortgage loan. There are nine standards that determine the consumer’s ability to repay – Borrowers won’t be able to say “The bank should have known I couldn’t pay.” There are legal penalties for banks that write loans that don’t meet the nine standards. And by meeting the standards, lenders are shielded from some liability when they originates a QM loan.
Banks and other lenders are free to make QM loans, but there are discouragements. For one, the lender could only sell 95% of the QM loan to the secondary mortgage market; it would have to keep 5% on its books as “skin in the game.”
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QRMs, on the other hand, are a subset of QM loans. They have to meet stricter standards — standards that still haven’t been determined, and could include the 20%-down requirement. A QRM would exempt a mortgage loan from a 5% risk retention requirement if included in a securitization. The trade group wants to be sure such a distinction is highly enforced.
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More importantly, neither Fannie Mae nor Freddie Mac will buy any part of a non-QRM loan. Considering that Fannie Mae and Freddie Mac own 90+ percent of the secondary mortgage market, that means it will be pretty hard for any lender to sell a loan that doesn’t meet QRM standards.
The bottom-line message to lenders from Dodd-Frank: “Your loans must meet some basic requirements, including the borrowers’ ability to repay (QMs). And if you want to sell those loans to Fannie or Freddie, they’ll have to meet even stricter requirements (QRMs).”
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ASF say they “support reforms that strengthen the confidence of the capital markets in the underwriting of residential mortgage loans.” The letter goes on to say that it hopes the proposal would be revised to clearly identify the definition of QM and what the consequences are of a loan rising to the level of QM status.
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Under theDodd-Frank Act reform, a mortgage lender is presumed to have satisfied the ability-to-repay requirement and receives some protection from liability when it originates a QM. So far, reports show that recent mortgages are meeting the nine QM requirements. The ultimate goal for The Consumer Financial Protection Bureau when it issues its final rule about QMs is for that rule “to balance the important need to protect consumers with the legitimate goal of providing institutional investors in the capital markets” by creating a stable financial environment.
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http://www.housingwire.com/2011/07/22/asf-wants-clear-definitions-between-qm-and-qrm
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SOURCE: HousingWire.com, Virginia Association of REALTORS
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NOTE FROM VIVIANNE: Good reform, but too late. That reform should have happen in 2003, before the housing bubble happened. The subprime loans and *exotic* loans are the biggest reason for the current housing industry problems.
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