"NAR supports a reasonable and affordable cash investment requirement coupled with quality credit standards, strong documentation and sound underwriting." - NAR President Ron Phipps
Last year Congress passed the most comprehensive regulatory reform that the financial services industry has ever seen. This reform bill was called the Wall Street Reform Act, but more commonly known as Dodd-Frank. The law set implementation of different portions at different times over the next 2.5 years. Much of the criticism of Dodd-Frank is centered around the fact that the law did not set forth the rules or requirements, but required the "regulators" to determine the rules that the industry must obey. Therefore, no one knows yet just what rules we have to follow.
The determination of these "rules" will not be made through votes in Congress, it will be the responsibility of the new regulator, the Consumer Finance Protection Board (CFPB), to determine exactly what those rules will require. Since the role of the CFPB has not yet been fully implemented, the current regulators (OCC, The Fed, FDIC, SEC, FHFA and HUD) weighed in on what their suggestions for these rules are. On March 29, 2011, the financial news relayed the announcement of one of the most important rule-making components of Dodd-Frank, the proposed rule for Risk-Retention and QRM.
Risk Retention
Dodd-Frank required securitizers and or originators of mortgage loans retain 5% of any loan/security they originate. This 5% must be held in a capital reserve account free from any other obligation. That means that ANY securitizer (and in certain circumstances originator), such as a small independent mortgage banker, large bank or wall street investor would have to set aside $5000 for every $100,000 loan closed. That does not seem like a big issue until you consider the volume and amount we are talking about. Let's say a company securitizes a group of 100 loans (pool of loans). If you assume a $200,000 average loan amount, that is $1,000,000 for each pool that the company would have to fund in a reserve account and stay in that account until the loan pays off. (There are several ways a securitizer can choose to hold the reserve, but this is the simple version.) If a $200,000 loan generates approximately $5000-10,000 in gross revenue, less expenses such as staff, commissions, servicing overhead, and loss mitigation etc, you have to ask yourself, "how do you generate the revenue shortage between the $10,000 retention requirement and what is left of the revenue generated on that loan?" That would shut down every small independent mortgage company within the first 30-60 days. Who does that leave to continue to offer options for mortgage loans? For those who remained, even the large banks would struggle to retain that capital reserve. As in any business equation, in order to cover that additional "cost" you must increase the profitability...read that to say, you increase costs to the consumer.
When Dodd-Frank was written, Congress was put under much pressure by the real estate finance industry to grant some protections or "safe harbors" to avoid this 5% requirement. The argument was made that certain loans DO NOT have the same risk to the market as others, thus do not need that additional "skin in the game" from the originator/securitizer. The Safe Harbor language was added as an amendment to Dodd-Frank, however, the exemption criteria was not determined in the law. It stated that any loan that meets the "Qualified Residential Mortgage" (QRM) requirements would be exempt from the risk-retention provision provided therein. This means that as long as the loan that is originated would be considered a "QRM" the lender does NOT need to hold 5% of the loan in reserve. The assumption was that regular loans like FHA, VA and FNMA/FHLMC loans (all the loans we now do in 2011) do not pose the risk that the stated income, negative amortization, balloons or interest only loans have posed in the past, therefore these loans would most likely be considered exempt.
The Devil is in the Details - QRM
We all know the saying about what happens when you ASSUME...and once again the point has been proven. As discussed, the law did not set up these parameters for what made the loan a QRM, the regulators have made their proposal and as an industry we have found out that our assumption of those exemptions was incorrect.
Proposed QRM Eligibility Requirements...
1. Purchase or Refinance of a Primary Residence, First Mortgage with a term no longer than 30 years - Not to include "bridge loans" "time shares" or "Reverse Mortgages"
2. A Borrower must not currently be delinquent on any debt and not been more than 60 days past due on any debt in the prior 24 months.
3. A Borrower may not have had within the preceding 36 months, a bankruptcy proceeding, had a property repossessed or foreclosed upon, or engaged in a short-sale or deed in lieu of foreclosure or been subject to a Federal or State judgment for the collection of any debt.
4. The loan must be fully-amortizing and not allow for payment terms that allow for interest-only payments or negative amortization.
5. The payment terms may allow for a fixed or adjustable interest rate, but would not allow for "teaser rates" and would not allow for pre-payment penalties.
6. Purchase loans would require a 20% downpayment and borrower payment of closing costs from acceptable sources.
7. Rate and Term Refinance loans would require a 75% loan-to-value ratio.
8. Cash-Out Refinance loans would require a 70% loan-to-value ratio.
9. A borrower's income must be fully documented and the proposed housing payment cannot exceed 28% of this income and all other debt including the proposed housing payment cannot exceed 36%.
10. The total points and fees charged on the loan cannot exceed 3 points.
11. A loan could not be assumable.
12. If a loan is originated and guaranteed by the United States government, ie-FHA, VA, USDA, Fannie Mae and Freddie Mac (only while they are held in conservatorship of the federal government)
Overview of Proposed QRM by the MBA
Real World Consequences on Our Market
No one should fault the idealism to which the regulators have used to create these proposed requirements, the intentions are well grounded. The problem lies in the fragile nature of the housing market today. Investors do not have the confidence yet in the private label security market and although these rules try to off-set some of the risk, the near term results in this economy is disastrous.
In today's market, what happens if a customer wants a "jumbo" loan, we are bound by the individual requirements of each individual investor that offers the program. The down payment requirements are more restrictive, the credit score requirements are higher and the interest rates can be upwards of .5 - 1.0% higher than that of a comparable "conforming" loan. If you look at the dramatic drop in sales in the price range from $600,000 and up and the stagnation in that market, at least some of that stems from the stringent and costly lending environment for Jumbo loans.
You can also look at the underserved markets and see the complete shutdown of lending in the under $100,000 price point. Based upon the definition of points and fees in the proposal, the costs involved with closing a loan would automatically exceed the 3 point fee limit thus pushing it outside the QRM requirement. These loans would typically be forced into the realm of FHA, but the Administration has indicated their expectation of more stringent guidelines for FHA to limit the volume of business that FHA will accept including increasing the down payment requirements.
What about the second home and investment market? If the QRM exemption only supports primary residences, would there be a market for these other types of properties? Will it become cost prohibitive enough for the would be real estate investor to consider another type of investment?
What Can Be Done
As I described, this is a "Proposal" that is out for "Public Comment." This process allows you to be heard. This is the only opportunity to voice the grave concern to its impact on our market. I would strongly encourage you to make your comments to the regulators. How many times have you asked, "Who do they get their information from?" Or have you thought, "what were they thinking?" Don't rely on someone else to take a stand. NAR can't do it alone, mortgage lenders can't do it alone. I can't do it for you. The only way for us to make an impact is for the regulators to hear from all of us in volumes. Each comment represents a segment of the market. Pass this around, get your colleagues involved tell your friends. The more they hear, the more they pay attention. As it stands, QRM is not a what if...it is a "how bad is it going to be."
Your opportunity to comment is available until June 10, 2011.
How to Comment
http://www.regulations.gov/
Under the "More Search Options" tab click next to the "Advanced Docket Search" option where indicated, select "Comptroller of the Currency" from the agency drop-down menu, then click "Submit." In the "Docket ID" column, select "OCC-2010-0002" to submit or view public comments and to view supporting and related materials for this proposed rule.
Report From Washington, DC
Once again, it was a very successful trip to educate our Congressional delegates to the concerns of the housing market in Arizona. As the topics get tougher and the stakes get higher, it was great to see the increased support from more of the professional leaders in our local market.
We were able to meet with Rep. Jeff Flake, Rep. Trent Franks, Rep. Ben Quayle, and Rep. David Schweikert as well as representatives from Rep. Gosar, Rep. Grijvala, Rep. Pastor and Sen. Kyl and Sen. McCain. We were also pleased to be able to stop in to Representative Gabrielle Giffords office to offer our honest and most sincere hope for her speedy and full recovery.
I wanted to thank those below who made the commitment to our industry of their time and money who made the trip. from left standing - Ted Theiste - Wallick and Volk, Rod Hill - AmeriHome Mortgage, (Rep. Schweikert) Amy Swaney, CMB - Citywide Home Loans, Kelly Powers - CNN Mortgage, Bob Kennedy - Homeowners Financial Group, Bill Rogers - Homeowners Financial Group
from left kneeling - PJ Harrigan, CMB - Franklin American Mortgage, Kelly Mueller - Alliance Financial Resources, Jamie Korus - Alliance Financial Resources, Cody Pearce, CMB - Cascade Financial Services, George Dover, CMB - Cascade Financial Services
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