Qualified Residential Mortgages Are Here – Prepare Your Comments
Under the Dodd-Frank Act, lenders will have to retain five percent of every loan sold on the secondary market, except for those that meet the definition of “qualified residential mortgages” (QRM).
On March 29, the FDIC Board voted to approve a QRM proposal, which now is open to public comment.
Under the proposal, a loan sold to investors will be exempt from a five percent retention under the following standards:
- Buyers must make a minimum 20 percent down payment. No allowance is made for mortgage insurance.
- Refis and “cash-out” refis would require an LTV of 75 percent and 70 percent, respectively.
- Debt ratios will be enforced. Mortgage debt can be no more than 28 percent of income and total debt (including car loans, student loans, credit card debt, etc.) cannot exceed 36 percent of income.
- Loans must be fully amortizing, eliminating interest-only and other exotic loans.
- Credit score standards were not included, but borrowers must have clean payment history on consumer debt. Borrowers couldn”™t have missed two consecutive payments on any consumer debt (including non-mortgage debt) in the past two years.
The only exception to the above is that loans sold to the GSEs Fannie Mae and Freddie Mac are automatically exempt due to their federal backing.
How strict are the proposed standards? According to the Wall Street Journal, “31% of all mortgages that the firms bought in 2009 would have met the proposed standard for a “qualified residential mortgage.” Prior to the housing boom, the years with the highest share of eligible “safe” mortgages were in 1998 (23%) and 2003 (25%).”
The proposed rule is open for comment until June 10. We encourage you to make your opinions heard. The agencies are especially open to proposals that would establish sound down payment standards, including possibly allowing for mortgage insurance to be account for the safety of the loan.