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Basel, QM and QRM – Disaster Averted, Mostly

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By Ken Trepeta

disaster_avertedThis time last year, we warned that 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 proposed Basel III international capital standards had the potential to severely restrict already tight credit standards and reduce mortgage provider choice over the next several years. Thanks to the hard work of NAR and its industry partners, the outlook is much brighter today. Furthermore, credit should be given to the Consumer Financial Protection Bureau (CFPB) and the other regulators who listened to industry concerns. While the rulemakings are not perfect, and there are still unanswered questions and issues, it is a far better outcome than it could have been.

Basel III
Basel III imposes greater capital requirements on the banking industry over the next several years. The main issue with Basel III and mortgages were the changes to risk weighting for various mortgage products depending on the issuer. Thankfully, the Federal Reserve largely reversed this plan in response to concerns that changing the risk weighting would make credit less available and more costly.

Another element of Basel III that is troubling to some is the diminution of the value of mortgage servicing rights. While this issue has not been addressed, the outcome may not be that bad if it forces a reduction in the concentration of loan servicing amongst the largest lenders.

Qualified Mortgage (QM)
The proposed QM rule was finalized this year. The two main issues were whether the QM would be sufficiently broad enough to capture the vast majority of the current mortgage market and whether QM would be a safe harbor for lenders or just give them the more limited protection of a rebuttable presumption. CFPB chose to make the QM fairly broad with a safe harbor, encompassing most loans eligible for FHA insurance and Government Sponsored Enterprise (GSE) backing.

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