by Broderick Perkins
(4/4/2011) If you think money is tight and mortgages are hard to get now, get a load of what could be coming.
On Capital Hill legislators, lobbyists, real estate industry experts and others are wrangling over Mortgage Reform and Anti-Predatory Lending Act provisions in the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Among the most discussed provisions is one that would create a Qualified Residential Mortgage (QRM), one that will be viewed as a loan offering a lower risk of default.
Dodd-Frank requires banks and other firms that issue mortgage-backed securities to keep 5 percent of the loans that they bundle and sell as securities. The idea is for banks to retain some of their mortgage based risks.
Perhaps, if banks previously had been required to hold onto some of their securities, Wall Street wouldn't have crashed under the weight of the toxic investments.
In any event, anything that regulators deem a QRM would be exempt from the 5 percent rule.
Because of the low risk, borrowers who qualify for a QRM will pay less than for a mortgage that is not designated as a QRM (Some analysts estimate that mortgage rates on non-QRMs could rise by as much as three percentage points.), but it won't be easy to land the loan.
According to the proposed definition borrowers would have to:
Put at least 20 percent down to buy a home.
Have at least 25 percent in equity to refinance.
Have at least 30 percent equity to do a cash-out refinance.
Have house payments that don't exceed 28 percent of before-tax income, and total monthly debt payments (house, credit cards, auto, student loans) couldn't exceed 36 percent of before-tax income.
Not have been 60 days delinquent on any debt payments in the last two years.
There's some confusion about how much the QRM issue will impact the housing finance market.
Mortgage giants Fannie Mae and Freddie Mac back more than nine in 10 of new loans and those loans are already exempted from current risk-retention requirements and will likely satisfy further risk retention requirements.
"We need to strike a balance between reducing investor risk and providing affordable mortgage credit. Better underwriting and credit quality standards have greatly reduced risk," said NAR President Ron Phipps.
"Adding unnecessarily high minimum down payment requirements will only exclude hundreds of thousands of buyers from home ownership, despite their creditworthiness and proven ability to afford the monthly payment, because of the dramatic increase in the wealth required to purchase a home," said Phipps, also broker-president of Phipps Realty in Warwick, RI.
NAR, along with the Center for Responsible Lending (CRL), National Association of Homebuilders (NAHB), and the Consumer Federation of America (CFA) sent a joint letter to federal regulators, urging them to avoid arbitrary high down payment requirements on mortgage loans.
"Instead, regulators should adopt standards for core underwriting factors to lower the risk of default. These include strong loan documentation, assessing a borrower's ability to repay, reasonable debt levels, and prohibitions on high-risk loan features," CRL says.
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