Amid the entire current flap, you’ve probably heard some noise about legislation to change the QRM (Qualified Residential Mortgage) requirements. As I understand it, the change would mean:
- Certain mortgage types would be eliminated
- You would need to put a minimum of 20% down
- You would need a minimum 690 FICO score
- The ratios of income to both the mortgage payment and overall debt would become much more conservative (28% and 36%)
This has caused quite a stir and a certain amount of “the sky is falling” hype. Even the National Association of Realtors has issued a “call to action” requesting REALTORS ask members of congress to defeat this legislation. I’m not so sure that’s a good idea.
First, we need to understand that this doesn’t mean only those who meet the criteria above are going to get a mortgage. There will still be programs available for people who don’t; they’ll just be a bit more costly in terms of interest rates and other costs. (And why shouldn’t lenders be able to charge more for higher risk loans?)
Second, we need to learn the lessons of history. Relaxed borrowing standards are partly responsible for the mess we’ve been in. Accuse me of over-simplification and I’ll probably plead guilty, but let’s not ignore the fact that a ton of “bad loans” were made At least one source reports that delinquency rates are 2 to 2.5 times higher for “non-QRM” loans.. We can debate the reasons, but this seems to be a bit of an effort to set a standard that suggests mortgages should be made to people who can afford to make the payments and have some equity in the balance.
I think that makes sense.
For a slightly different perspective, let’s assume you have your property listed for sale and I’m your agent. Let’s also assume you don’t have a mortgage on it… maybe it’s a second home or piece of land. A buyer approaches us with an offer to purchase but asks for owner financing. No problem, right? He’s offering full price! You’ll get to charge interest…
So far I’ve left out one important detail. When the buyer made that offer I asked him why he was requesting owner financing. He replied, “Well, I just lost my house to foreclosure and can’t get a mortgage.” (Believe it or not, I’ve had this happen more than once and the buyers often don’t “get” the fact that if the bank isn’t going to loan them money, the seller probably won’t either.)
“Ah,” you say. “Let’s make the deal. So what if he can’t pay? I’ll just take the property back and keep any payments he does manage to make.” Before we make the deal, here’s an easy assignment. Call an attorney and ask her just how easy it is to foreclose and how much it costs. Oh, and did I mention that after you finally manage to foreclose your property will be worth significantly less thanks to a declining market?
My point here is that we are defining a standard for a Qualified Residential Mortgage and it makes some sense to make that standard conservative. That doesn’t prevent a lender from offering mortgages to people who do not meet that standard. It does require a lender to “retain risk” by keeping a percentage of loans that don’t meet the standard.
Of course I truly am just scratching the surface… to make the point that the flap about QRM is not the issue it’s being made out to be. The sky won’t fall if this legislation passes—and it’s at least mildly interesting that most of the groups crying out against it stand to benefit the most if it doesn’t pass. We might want to consider that legislation that benefits a particular industry is not necessarily legislation that benefits the majority or the economy in general.
An excellent article on this topic by RIS Media notes, “Many potential buyers are scared off by worries that a home bought this spring could be worth less a few months later, given that prices have fallen by more than 8 percent over the past 12 months, according to Zillow.com.” If that’s true (and I think it is) tightening up lending standards is not going to slow the market much. And for those who are with still with me… don’t let this fact escape you: declining prices contribute to the risk factor of making mortgages.
This is undeniably complicated legislation and I’m not dealing with those complications, but I’m also not willing to overlook common sense.