What is QRM? And, Why You Should Care

Qualified Residential Mortgage, known as QRM, is a new type of low-risk mortgage with anticipated lower interest rates. Sounds benign enough, right? But, let’s look a little closer… it’s the details that make the difference and, fortunately, QRM is finally arousing the fear and respect it deserves. So, how do you really define QRM and what’s it for?

The Dodd–Frank Wall Street Reform and Consumer Protection Act signed into law about a year ago  required lenders to retain a portion of the risk of the loans they sell to investors, unless the loan was deemed “safe.” These exempt loans are known as QRMs; the task of officially defining QRM was left to the wisdom of federal regulators. While the specific details are not yet defined, once they are, QRMs will be the most desirable loans for lenders to make to homebuyers since they will be more profitable and easier on the lenders’ back offices.  At issue are the attributes that qualify a QRM, including credit score, debt-to-income ratio, and the granddaddy of show-stoppers, the size of the down payment. (Our thoughts about down payment size) The current down payment proposal for QRMs would provide incentives for lenders to require a minimum down payment of 20 percent. keep reading

The Myth of “Skin in the Game”

When discussing the future of housing finance, nothing stirs more passion than the question of what sort of down payment is appropriate when buying a home- 0%? 5%? Maybe 10% or even 20%? It’s called “skin in the game”.

While all sides believe their positions are rooted in fact, hard data is rarely cited. For those in the ‘bigger is better’ camp, opinions are ‘supported’ by vague incantations like ‘low down payments caused the real estate crisis’ or, the government is ‘wasting’ tax payers’ money by subsidizing home ownership. Many of these advocates for larger down payments and no down payment assistance- typically homeowners themselves- fail to acknowledge that they too benefit from a significant federal subsidy- the home mortgage interest deduction.

The level of emotion and sometimes outright hostility engendered by this debate can only be explained by deeply held opposing world views on who is qualified to own a home. It’s certainly an important debate as housing policy is reconsidered. It would be interesting to understand more about the forces that shape these views, but we’ll leave that to social scientists and other academics.

You’ve probably figured out by now that we believe high loan-to-value lending is safe and sustainable when executed responsibly. keep reading

Update: Recent industry conferences examine the future of housing finance

10% down “affordable”?

We’re back after attending two excellent real estate conferences. Not surprisingly, the major concern permeating each was the future of housing finance and especially, what the real estate industry and consumers have to look forward to regarding down payment requirements.

At the NAR Midyear Legislative Conference in Washington, D.C., we held dozens of meetings with key multiple listing services (MLS) and REALTOR® Association executives. Their number one concern is how confident their members, as well as buyers and sellers, can be that the homes they buy or sell will be financed and closed.

This is understandable given the current challenges of financing home sales. However, issues today may look like child’s play compared to what could happen if certain measures proposed in Congress and the U.S. Treasury are enacted. Here’s what the real estate industry knows today:

  • Rapidly changing credit and collateral standards over the last few years have reduced the percentage of homes closed in relation to the number of sales contracts written.
  • The move-up market remains grid-locked without more first-time homebuyers.
  • The May 19 Campbell/Inside Mortgage Finance HousingPulse Survey showed the proportion of first-time homebuyers in the housing market fell to 35.7% in April compared to 43.4% a year earlier.
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