Monday, May 23, 2011

Risk Retention, Qualified Residential Mortgages and the Future of Housing

As the chairwoman of the local Hispanic Chamber of Commerce here in El Paso, I spend a lot of my time in meetings.  Lately, those meetings seem to have mainly to do with growth, traffic, housing and the future of our community.  Friday morning, for example, I spent several hours at a meeting to determine where we as a community expect to have our population growth.  I was involved in a round table discussion with an engineer from Tx Dot (Texas Department of Transportation) a representative from the city of El Paso and a representative from Las Cruces, New Mexico and we looked at aerial maps and tried to make our best educated guesses about what directions our city can be expected to grow in over the next few years.  El Paso currently has a population of slightly over 800,000 people, according to the 2010 Census, and we are land locked by the New Mexico state border on one side and the international border with the nation of Mexico on the other side.  So we have to look at growth carefully as it pertains to traffic, to infrastructure, and to how we plan to provide services for those who are moving into our community.

What is always interesting to me at these meetings is that we hear a lot about various developers who have pockets of land that they are planning to develop into communities.  But most of the people sitting at the table seem to assume that those communities of the future will be single family housing which will be purchased by the occupants.  And they always seem surprised when I tell them that if the mortgage rules that are being created by Dodd Frank continue on as they are shaping up now, we can actually look for very little of our future housing to be single family residences.  The "smart communities" of the future are going to be rental communities for the simple reason that the new rules keep too many people locked out of homeownership.

The clock is ticking on the public comment period for the FDIC's qualified residential mortgage proposal and still almost nobody outside of the industry seems aware that such a proposal even exists.The new proposed guidelines require a 20% down payment for a purchase, 25% equity for a refinance and 30% equity for a cash-out refinance. The borrower's debt to income ratio cannot exceed 28% for his housing ratio to his income and 36% for his total debts to his gross income. These ratios do not have compensating factors--allowing, for example, high cash reserves to be used to offset a higher ratio. As an additional blow, any borrower with a 60 day delinquency on his credit report will not qualify for a QRM.

Using these guidelines, only 20% of the loans sold to Fannie and Freddie over the last 10 years would have met the criteria of a QRM. The Federal Housing Finance Authority found that less than one-third of loans sold to Fannie and Freddie in 2009 would have met the QRM guidelines, and 2009 was one of the strictest underwriting years on record.

Any loan not meeting the QRM guidelines will be subject to 5% risk retention by the originator.  That means that to originate at $200,000 loan, the originator would have to be able to retain $10,000 of that loan for the life the loan.  (Risk retention guidelines implemented by Dodd Frank state clearly that the retained portion cannot be sold off separately.)  Those dollar amounts will add up fast, so the risk retention guidelines will ultimately exclude a lot of smaller originators from originating anything except a QRM.

The comment period for the QRMs is up June 10, so with only a couple of weeks away, the National Association of Mortgage Brokers  legislative chair Mike Anderson has produced a video to make people aware of the problems caused by QRMs.  Click here to see the video.   You can also click Here to see a copy of the letter that Anderson has written to Congress regarding QRMs.

Of course, NAMB is not the only organization working on the proposed risk retention and "zero percent risk retention guidelines." The Mortgage Bankers Association has testified in front of Congress on this issue. 

What does surprise me is the level of unawareness the general public has regarding these issues.  When I tell community planners that at the end of the year when these guidelines go into effect, potential homeowners who want the best rate will have to put 20% down, have no more than a 36% debt to income ratio and be current within 30 days on their obligations, they are shocked.  After all, a $200,000 home would require $40,000 down payment plus closing costs, putting it well out of the range of many young El Paso families.  When I tell them that those who cannot qualify will go into a loan where the lender maintains 5% of the risk--which will probably be mainly one of the major banking entities--Wells Fargo, Chase or BofA--and that these loans are expected to cost 3 times as much as a "qualified residential mortgage" they are even more shocked.  FHA has always been a popular product in our community, even though our community FHA loan limit is capped at around $275,000.  But now that FHA has a mandate to reduce its lending presence to between 10 -15% of mortgage loans, most El Pasoans are going to be left out of homeownership permanently.

We are starting to hear more and more that "homeownership is no longer part of the American Dream."  But it seems to me that most of the people spouting this mantra already have a home of their own or have achieved sufficient financial success that they certainly could purchase a home if they wanted to.  But for young families trying to build a future, homeownership has always represented security and wealth creation.  By setting guidelines up so high that homeownership cannot even be an option, we are depriving them of the benefits that homeownership offers.

If you want to weigh in on the QRM standards, you have until June 10 to do so.  Get involved in this issue before the guidelines are mandated later this year.

For related articles, visit

1 comment:

  1. Hi,

    The housing market of the future can drive economic growth without shutting out responsible home buyers. It will also take a broader perspective and evaluate the future of housing finance. This will include an evaluation of the mortgage interest tax deduction, affordable housing issues, the future role of government-sponsored entities. Thanks a lot...

    Sell Note