Today, six federal agencies issued a Proposed Risk Retention Rule calling for a Qualified Residential Mortgage to be equal to a Qualified Mortgage (QRM = QM). The Consumer Financial Protection Bureau (CFPB) acted in January of this year to define QM. Defining these two terms is required by the Dodd-Frank Wall Street Reform and Consumer Protection Act. However, the proposed QRM definition turns the statutory language and the agencies’ earlier analysis upside down.
A QM was intended in Dodd-Frank to define a minimum loan standard, not to define a low risk loan. Certainly the CFPB’s QM definition demonstrates this–a QM may have no down payment, a 580 FICO credit score (a score in the bottom one-eighth of all scores), and a 50%+ debt-to-income (DTI) ratio (if approved by Fannie, Freddie, or FHA). A loan with these characteristics is certainly not “prime,” yet the CFPB would call such a loan prime.
A QRM was intended to set a standard for loans placed in a mortgage backed security (MBS) that have a low credit risk as evidenced by their past performance. In their earlier March 2011 proposed QRM rule, the six agencies defined a QRM as a loan with a “low risk of default even in a stressful economic environments that combine high unemployment with sharp drops in home prices”. They concluded based on substantial and rigorous research that to be a low risk loan, it needed demonstrate three qualities: a substantial down payment of 20% (or low loan-to-value on a refinance loan), a clear demonstration of credit worthiness, and a DTI ratio of less than or equal to 36%.
“QRM = QM” clearly does not pass muster under any low risk standard.
The long-term credit performance of the housing mortgage market can only be as sound as the underwriting practices used to originate a preponderance of loans in that market. It is axiomatic that a sound market requires that the preponderance of loans be prime or low risk loans. By caving in to the demands of the lobbies representing the Government Mortgage Complex, both the CFPB and the six agencies are committing a grievous error. Calling QMs a prime loan and making QM = QRM gives risky loans an imprimatur they do not deserve. This is a repeat of the false comfort Fannie and Freddie gave to the definition of a prime loan. As we now know there was little that was prime in most of their prime loans.