President Obama Takes On Qualified Mortgage Rules

By Gretchen Wegrich

The mortgage and real estate industries may have found an ally; in his state of the Union address on February 12, President Barack Obama called for streamlined mortgage rules.

"Right now, overlapping regulations keep responsible young families from buying their first home," Obama said. "What's holding us back? Let's streamline the process, and help our economy grow."

In his speech, the president was broadly referencing a variety of rules that constrict credit availability.

Mortgage bankers and real estate agents who favor changing the proposed regulations requiring lenders to keep a stake in risky loans say the president's comments support their vision.

Under fire is the Qualified Residential Mortgage rule, which banking regulators plan to implement later this year. In 2011, mortgage regulators drew criticism when they released a draft of the rule requiring lenders to maintain liability for mortgages with down payments of less than 20 percent and those issued to borrowers who regularly spent more than 36 percent of their income on debt.

Reform Proposed to Qualified Residential Mortgage Rule

Bankers and consumer groups argue that the Qualified Residential Mortgage rule will cut creditworthy borrowers out of the market. The rule will change who qualifies to borrow and who can lend because banks will modify their lending policies to meet the new standards.

Today, lawmakers and members of the mortgage industry are asking regulators to rewrite the Qualified Mortgage Rule with a similar regulation that is also designed to prevent high-risk home lending: the Qualified Mortgage rule.

Released in January, the Qualified Mortgage rule grants legal protection to banks that issue loans to borrowers spending fewer than 43 percent of their income on repaying debts.

Advocates for reform of the Qualified Residential Mortgage rule hope regulators will drop the down-payment requirement and increase borrowers' allowable debt load to 43 percent, creating nearly identical requirements for the Qualified Mortgage and Qualified Residential Mortgage rules.

"The industry, consumers and legislators on Capitol Hill are all saying QRM should equal QM," said Joe Ventrone, vice president for regulatory affairs at the National Association of Realtors.

He added, "A revised QRM definition should track the QM to ensure that all qualified borrowers have access to affordable and safe mortgage credit without a stringent down-payment requirement."

The issue of a reformed QRM rule has drawn the attention of lawmakers as well.

"I'm hearing a lot of concern about how the interaction of some rules will reduce mortgage credit," said Idaho Republican Senator Mike Crapo in a Senate hearing on financial regulation.

A Bipartisan Reform Effort

The bipartisan group of senators who drafted the 2010 Dodd-Frank Act, which created the requirement of the Qualified Residential Mortgage rule, submitted a written request to regulators requesting that the strict down-payment requirement be revised.

“Our intent as the drafters of this provision was, and remains, clear: to incent the origination of well-underwritten mortgages with traditional terms,” Georgia Republican Johnny Isakson and Democrats Mary Landrieu of Louisiana and Kay Hagan of North Carolina said in the letter. “We intentionally omitted a specific down payment requirement and never contemplated the rigid 20 percent or 10 percent as discussed in the March 2011 notice of proposed rulemaking.”

The finalized Qualified Residential Mortgage rule is not expected to be released for several more months.

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Gretchen Wegrich

Gretchen Wegrich is an editor at Lender411. She specializes in mortgage basics, personal finance and green living. She graduated with a bachelor's degree in writing from University of California, San Diego and previously worked at the Santa Cruz Sentinel. Contact her at gretchen@lender411com.