WASHINGTON – A new regulatory proposal offered Wednesday is trying to ensure that the country’s housing-finance system is protected from another mortgage meltdown.
The plan from the Federal Reserve and five other regulators calls for lenders to keep a 5 percent stake in the credit risk for certain securitized loans that don’t meet “qualified residential mortgage” standards.
These QRM loans are designed to be particularly safe by making sure that borrowers can afford their mortgages. The idea behind the rule is to force lenders to have “skin in the game” when they make and securitize loans that don’t meet QRM standards.
Under the new QRM proposal, a borrower’s total debt-to-income ratio would be capped at 43 percent and loan terms could not exceed 30 years, among other requirements. Those guidelines mirror a final qualified-mortgage, or QM, rule adopted earlier this year by the Consumer Financial Protection Bureau that provided legal shelter to lenders who made such loans. An earlier proposal for the QRM rule had included a provision calling for borrowers to make at least a 20 percent down payment.
Wednesday’s proposal also contains a risk-retention exemption for loans backed by Fannie Mae and Freddie Mac while the mortgage buyers remain federally controlled. This is a significant carve-out, as Fannie and Freddie back a large share of the market, and U.S. lawmakers are expected to take quite a while to agree on a bill that winds down the government-sponsored enterprises.
Consumer advocates and banks have been particularly focused on QM and QRM because the rules are expected to have a dramatic impact on lending. By making loans that meet QM and QRM standards, lenders will receive legal protection and won’t have to keep a stake in securitized loans.
There has been concern that if QM and QRM guidelines are too strict, many creditworthy borrowers would be unable to obtain a mortgage. Indeed, the 20 percent down-payment provision was dropped in Wednesday’s plan following criticism from industry groups and consumer advocates that too many good borrowers wouldn’t be able to get a loan.