As published in Scotsman Guide's Residential Edition, May 2011.
In today's regulatory environment, mortgage brokers face new challenges almost daily. This past March, I spoke with Mike Anderson, the National Association of Mortgage Brokers government-affairs committee chair, about some of these issues.
When we spoke, loan-originator-compensation changes were top of mind for Anderson. Beyond loan-originator compensation, however, he said additional challenges may be more harmful to the housing industry. Specifically, he discussed qualified residential mortgages (QRMs), which will give safe harbor against lender risk-retention requirements.
The QRM is a concept born out of the Dodd-Frank financial-reform act. Specifics have not been established yet, but the discussion began when the U.S. Department of the Treasury, the Federal Reserve System, the Federal Deposit Insurance Corp., the U.S. Department of Housing and Urban Development, the U.S. Securities and Exchange Commission, and the Federal Housing Finance Agency — six different regulators — released a 233-page publication (sctsm.in/QRMprop) containing a proposed definition in late March. The commenting period on the rule is open through June 10. (Editor's note: The comment period has since been extended to Aug. 1.)
QRM and risk retention, aka "skin in the game," are closely related. Under the rule, mortgages that meet QRM requirements will not be subject to a 5 percent risk-retention requirement for securitized loans. Mortgage loans backed by the federal government — such as Federal Housing Administration, U.S. Department of Agriculture Rural Development and U.S. Department of Veterans Affairs loans — are exempt. Dodd-Frank specifically states that Fannie Mae and Freddie Mac are subject to the QRM definition and risk-retention requirements.
To be considered a QRM, a loan must meet numerous proposed guidelines. This includes not having nontraditional loan features, such as negative amortization or interest-only payments; an 80 percent loan-to-value ratio (LTV) for purchases and 75 percent for refis; and tighter credit standards requiring that borrowers not have 60-day delinquencies on any debt obligation in the previous 24 months. Although the proposal acknowledges that mortgage insurance may offset losses, it likely will not be used to allow a higher LTV for QRMs.
The QRM model will have a drastic impact on credit availability for homebuyers and homeowners. Under these rules, conventional loan costs will soar, and government loans will have a competitive advantage. The administration already has stated that it intends to reduce the market share of government loans, which likely means there will be lower maximum loan amounts.
This will affect all housing-market participants. If you haven't already, it's time to join your respective lobby group and make your voice heard.
Richard Smith is a loan originator with Churchill Mortgage in Chattanooga, Tenn. He had been the retail manager with American Acceptance Mortgage Inc. for 15 years.
He lends in Tennessee and Georgia. He has originated government, conventional and jumbo loans since 1994. Smith writes a monthly column on regulatory and legislative issues for Scotsman Guide. Reach Smith at (423) 899-6898 or at firstname.lastname@example.org. Visit www.richardsmithhomeloans.com for more information.