QM, QRM to Lock in Tight Loan Standards

October 26, 2012

Home mortgage originations will shrink by up to 20 percent and the economy as a whole will be clipped 1.1 percent over the next three years if federal regulators proceed with their proposed qualified mortgage (QM) and qualified residential mortgage (QRM) rules, and international regulators proceed with implementation of international capital standards under Basel III. 

That’s the assessment of analysts with American Action Forum, a public policy institute. The analysts say QM, QRM, and the Basel III standards, if implemented in their current form, would effectively lock in the extremely tight credit standards lenders have put in place since the mortgage crisis.

“One way to think about the impact . . . is that the rules essentially make permanent current credit conditions in which originators have independently scaled back activity in response to the legal and reputational costs associated with GSE [Fannie and Freddie] ‘put-backs’ and the risk thereof,” the analysts say in their October 2012 report, “Regulatory Reform and Housing Finance: Putting the ‘Cost’ Back in Benefit‐Cost,” released yesterday. The authors are Douglas Holtz-Eakin, Cameron Smith, and Andrew Winkler. 

“The bottom line effects of [QM, QRM, and Basel III] may include up to 20 percent fewer loans, resulting in 600,000 fewer home sales,” the analysts say. “In turn, the resulting tightened lending and reduced sales are estimated to cost up to 1,010,000 housing starts, 3.9 million fewer jobs, and a loss of 1.1 percentage points from GDP growth over the next three years.

“Taken as a whole,” the report goes on, “QM, QRM, and B3 [Basel III] will limit the amount and variety of mortgages that banks will hold in portfolio. They will also cause banks to be cautious in how they originate loans for sale to the GSEs [secondary mortgage market companies Fannie Mae and Freddie Mac] and FHA for fear of writing loans that will not be accepted and would then have to be held in portfolio.”

QM, QRM, and Basel III are slated to be released in early 2013. Banks have said they’re already locking in their tight credit standards in anticipation of the rules.

The National Association of REALTORS® has taken issue with QM and QRM as proposed, because they would lock in rigid and overly tight down payments and debt-to-income ratios, and limit lenders’ flexibility in providing reasonably priced loans to borrowers with less-than-stellar credit profiles. QM sets underwriting standards to ensure lenders only make loans to borrowers who have the ability to repay them, and QRM sets additional standards for loans that are securitized for sale to investors. For securitized loans that don’t meet QRM, lenders have to hold back 5 percent of the value of the loans on their books, making them prohibitively expensive for borrowers.

More on the report.

More on NAR’s concerns over QM, QRM, and Basel III.

— Robert Freedman, REALTOR® Magazine