Dodd–Frank Wall Street Reform and Consumer Protection Act, ESMBA, Mortgage loan, QRM, qualified residential mortgage, risk retention, skin in the game, too big to fail, unintended consequences

Housing trouble ahead from the QRM provision in Dodd-Frank?

The best intentions of Washington can often result in negative, albeit unintended, consequences.

A perfect case in point is the QRM provision in Dodd-Frank!

The proposed Dodd-Frank Wall Street Reform and Consumer Protection Act includes a provision that goes by the acronym QRM, or Qualified Residential Mortgage.

I recently attended a meeting of the Empire State Mortgage Bankers Association (ESMBA) at which this piece of legislation was debated for quite some time.

The main focus of the attendees centered on the proposed requirements that lenders who sell their loans rather than portfolio them, set aside an amount equal to 5% of the loan as risk retention.

In other words, the QRM provision would mandate that they have some “skin in the game.” This 5% risk retention rule would apply to any non-QRM loan.

Those lenders not falling into the “too big to fail” category of banks would simply not be able to tolerate or compete with that amount of capital in essence being locked up. It would further constrict a lending environment that is already quite constricted.

Some of the other findings concerning the current form of the QRM provision:

  • Regulators should go back to the drawing board on the proposed QRM rule. As written, it violates Congressional intent, makes home ownership more expensive for millions of responsible consumers, and jeopardizes the fragile housing recovery.

  • Congress left a down payment requirement off the list of suggested QRM standards in the Dodd-Frank Act because it determined that the cost of excluding responsible middle-class families would exceed the modest improvement in default rates.

  • Requiring strong underwriting; documentation of income and financial resources; and safe mortgage products is the best way to minimize defaults while making safe and affordable mortgages available to a wide range of creditworthy borrowers.

  • Existing homeowners, who have suffered declines in the value of their homes in the past few years, would be denied access to the best products and the lowest-cost credit when they attempt to refinance their existing mortgages if this proposed rule remains unchanged.

Calls for change in the language of the legislation has come from more than 250 members of the U.S. House of Representatives, many U.S. Senators and by industry groups such as The Coalition for Sensible Housing Policy.

Stay tuned!

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