The pending rulemakings for the Qualified Mortgage (QM) and Qualified Residential Mortgage (QRM) rules mandated by the Dodd-Frank Act and the Federal Reserve’s recently proposed Basel III international capital standards have the potential to severely restrict already tight credit and reduce mortgage provider choice over the next several years. These three pieces of unfinished business leave the housing finance industry in a state of tremendous uncertainty regarding what will be required of them to originate mortgages. Elements of each of these proposals point toward unavoidable higher costs for homebuyers as well as reduced access to mortgage credit.
Basel III imposes greater capital requirements on the banking industry over the next several years. The main issue with Basel III and mortgages is the change to risk weighting for various mortgage products depending on the issuer. FHA loans are the most favored because of their clear and direct government backing. GSE loans do not receive the same treatment even though the GSEs are currently being backed by the government. Essentially, what Basel III does is require greater risk weighting depending on loan-to-value (LTV) ratios. This will likely translate into less high LTV lending or even greater costs to consumers who borrow with smaller down payments.
Another element of Basel III that is troubling is the diminution of the value of mortgage servicing rights. Basically, the new rule will reduce the value of servicing causing lenders to sell off servicing rights or perhaps reduce lending overall.
The proposed QM rule is due to be finalized by the end of the year. The two main issues are whether the QM will be sufficiently broad enough to capture the vast majority of an already tight mortgage market and whether QM will be a safe harbor for lenders or give them the more limited protection of a rebuttable presumption.
Industry has argued for a broad QM that does not limit access to credit and the CFPB seems sympathetic to those arguments. However, CFPB has been less sympathetic to the safe harbor argument. Industry believes a safe harbor is necessary to ensure maximum lending to eligible borrowers. With a rebuttable presumption, lenders big and small are likely to tighten lending well within the QM to ensure that an ability to repay violation rarely or never occurs.
Furthermore, smaller lenders fear the costs of potential litigation under rebuttable presumption. There is concern that litigation costs will be so great that many will not take the risk at all and push lending to the larger banks that have the ability to better manage that risk. But the catch-22 is Basel III. The fear is that while lending may be pushed to the larger banks, the banks will either be unable or unwilling to absorb that lending because of its effects on their capital requirements. Even if they do absorb it, it will likely be much more costly to consumers.
The QRM, which requires 5-percent risk retention for securitized loans that do not meet the QRM standard, cannot be broader than the QM. It seems the regulators have backed away from requiring a 20 percent down payment. However, it is unclear where they have “ended up.” Ideally, the QRM would track evenly with a broad QM with a safe harbor, but there is no guarantee that will be the case.
Basel III, QM and QRM could have a major impact on the cost and availability of mortgage credit. If they do not come out right from an access to credit standpoint, many otherwise eligible borrowers will be denied access to mortgage credit and others will pay significantly more for that credit. Needless to say, this would not bode well for a healthy housing market.
This column is brought to you by the NAR Real Estate Services group.
Ken Trepeta is the director of Real Estate Services for the National Association of REALTORS®.
For more information, visit www.realtor.org.