QRM Qualified Residential - Can You Afford a 20% Down Payment to Buy a Home?

Qualified Residential Mortgage (QRM) and Risk Retention: Background

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) became law on July 21, 2010. Section 941 of the Dodd-Frank Act requires financial institutions that securitize mortgages loans to retain at least 5 percent of the credit risk.

The Dodd-Frank Act, however, exempts from the risk-retention requirement securities backed exclusively by “qualified residential mortgages,” or QRMs—mortgages with underwriting and product features that historical loan performance data indicate result in a lower risk of default. By exempting QRMs from the risk-retention requirement, the cost of securitizing these mortgages is reduced, thus providing a market incentive for the wide origination of responsible loans.

Highlights of the Proposed QRM Standards

The proposed QRM rule would require an 80% LTV, which requires a 20% down payment.

The proposed rule would also limit the mortgage payment to 28% of gross income and limit all debt to 36%.

No credit score requirement is included, but a mortgage loan would qualify as a QRM only if the borrower is not currently 30 or more days past due on any debt obligation.

Borrowers could not have been 60 or more days past due on any debt obligation within the preceding 24 months.

Borrowers could not have, within the preceding 36 months, been through bankruptcy, been foreclosed on, engaged in a short sale or deed-in-lieu of foreclosure, or been subject to a Federal or State judgment for collection of any unpaid debt.

The QRM definition is of extraordinary importance for three reasons:

1. It will determine the types of mortgages that will be generally available for borrowers for the foreseeable future.

2. It will serve as a precursor for what the successor(s) to the current GSEs (Fannie Mae and Freddie Mac) are likely to be allowed to securitize.

3. Finally, the QRM proposal will telegraph the administration’s intentions for FHA. A narrow QRM will require severe tightening of FHA to prevent huge increases in FHA’s already robust market share.