Pioneer Valley home buyers and sellers should be paying attention to recent reports regarding what has been dubbed a “re-proposal” for Qualified Residential Mortgages (QRM). If finalized, the new proposal for QRMs will be good news for the Pioneer Valley real estate market because it eliminates a down payment requirement that would have put home ownership out of reach for a large segment of the population.
When banks write a mortgage, they usually package them with other mortgages and sell them as a mortgage-backed-security to the secondary mortgage market. Leading up to the financial crisis, many banks were writing mortgages to borrowers who couldn’t afford them and subsequently selling them, thereby passing on the risk of bad mortgages to investors.
As part of the Dodd-Frank Wall Street Reform and Consumer Protection Act there were two types of lending standards put in place―Qualified Mortgages (QM), which the Consumer Financial Protection Bureau (CFPB) finalized earlier this year and requires that lenders issue loans that a borrower has demonstrated an ability to repay, and Qualified Residential Mortgages, which originally had a 20% down payment requirement with a 36% debt-to-income ratio and required banks to keep a 5% stake in any loan they package and sell as a security. QMs protect the consumer and QRMs protect the financial industry. The QM rule will go into effect in January 2014.
However, because lenders will be required to keep a 5% stake in mortgages that do not meet the QRM rule, lenders will not be inclined to write QMs as they can pass on 100% of the risk if they only write QRMs. As originally proposed, the QRM rule would have put mortgages out of reach to most home buyers due to a 20% down payment requirement. Limiting the number of qualified home buyers would have a deleterious effect on the Pioneer Valley real estate market. I regularly put together real estate transactions with less than a 20% down payment.
The new re-proposal eliminates the down payment requirement and reduces the debt-to-income ratio to 43% as long as they meet the standards of the Qualified Mortgages.
The National Association of REALTORS® (NAR) lauded the changes to the original QRM proposal, for which they lobbied.
“This version of the QRM rule will give creditworthy buyers access to safe and affordable loan products without overly burdensome down payment requirements,” said NAR President Gary Thomas in prepared statements posted on Realtor.org. “The new standards, which align with those applied to Qualified Mortgages, are stringent enough to protect consumers from unscrupulous lending practices while also creating new opportunities for private capital to reestablish itself as part of a robust and competitive mortgage market.”
An alternative “re-proposal” also contradicts the one that eliminates the 20% down payment requirement that actually increases it to 30%. The alternative plan also calls for a 70% loan-to-value requirement.
This would obviously be a burdensome requirement to most home buyers and effectively make home ownership a privilege of the wealthy. According to NAR, it would take 25 years for the average American to save for 30% down payment on modest home.
The regulators involved in the QRM rule proposal are: the Federal Reserve Board, the FDIC, the Federal Housing Finance Agency, the Department of Housing and Urban Development, the Office of the Comptroller and Currency, and the Securities and Exchange Commission. They are all taking comments on the proposal until October 30.
If you are planning on buying or selling a home in the Pioneer Valley, make your first call to Michael Seward at 413-531-7129.