A proposed rule to improve the safety of securitized mortgages by instituting risk retention was said at a House hearing on Thursday to be too strict. The rule states that qualified residential mortgages (QRM) can be exempted from the rule’s requirement for 5% risk retention, but there are conditions governing just what constitutes a QRM.
Testimony before the House Capital Markets Subcommittee on risk retention garnered testimony from a wide variety of bodies, including consumer advocacy and mortgage banking, who said that one condition required for a mortgage to qualify as a QRM was set too high: a 20% down payment.
While the rule has been approved by federal regulators, testimony pointed toward an unintended consequence: It would disqualify the vast majority of those wishing to buy a home. Ellen Harnick, senior policy counsel for the Center for Responsible Lending, said in her testimony that the proposed rule did the opposite of what the Center said was the best outcome: QRMs as the loans of choice for most borrowers, and other loans subject to strict regulation to address abuses.
The rule would make QRMs "available only to a small proportion of creditworthy families," she said, because of "down-payment, debt-to-income and credit history requirements so extreme they would exclude much of the middle class, along with large numbers of creditworthy families of color and low- and moderate-income borrowers, from access to QRMs."
Henry V. Cunningham, Jr., president of Cunningham & Co. and speaking on behalf of the Mortgage Bankers Association, agreed that the standard was too restrictive. He told the committee, "the QRM definition is so restricted that 80% of loans sold to Fannie Mae or Freddie Mac over the past decade would not meet these requirements."
Another criticism of the rule was that lenders, reluctant to hold risk on mortgages that did not meet the QRM criteria, would price borrowers out of the market who could not qualify for a QRM and thus make it nearly impossible for most of the middle class to save enough to buy a home. Kevin Schneider, president and CEO of U.S. Mortgage Insurance of Genworth Financial, testifying on behalf of Mortgage Companies of America, said, "[A]t a typical savings rate, it would take a family earning $50,000 a year, more than eleven years to save a 20% down payment on a $153,000 home."
In the face of such comments, the committee was fairly consistent in its agreement that 20% might be too high a requirement. Now under consideration is a proposal to lower the rate. Rep. Jeb Hensarling, R-Texas, said of the testimony, "Any time you get the mortgage bankers, the mortgage insurers, the Center for Responsible Lending and Congressional Black Caucus to agree on something, maybe this committee should pay a little bit of attention."