The devil is in the details part II
Regulators mull making the QRM definition identical to CFPB's new 'Qualified Mortgage' rule

Article Highlights

  • QM/QRM will codify HUD’s view that the way to distinguish a prime loan from a subprime one is by the interest rate charged, not risk.

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  • Booms are fueled by excessive leverage.

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  • QM/QRM will do little to limit the borrower leverage and merely lay the foundation for the next bust.

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Last month it was the Consumer Financial Protection Bureau (CFPB) promulgating its Dodd-Frank Act mandated Qualified Mortgage rule (QM). Dodd-Frank imposed QM to set minimum mortgage standards. Yet it is now being touted as making sure “prime” loans will be made responsibly. True to the government’s long history of promoting excessive leverage, QM sets no minimum down payment, no minimum standard for credit worthiness, and no maximum debt-to-income ratio. The rule provides an eight-year pass for loans approved by a government-sanctioned underwriting system.

Today, Fed Chairman Bernanke dropped the other shoe when he indicated that bank regulatory agencies may make the Dodd-Frank mandated Qualified Residential Mortgage rule (QRM) identical to QM. Loans meeting the QRM standard are exempt from the Dodd-Frank 5% risk retention requirements. Dodd-Frank indicated that QRMs are to have underwriting and product features that historical loan performance data indicate result in a lower risk of default. Somehow the absurdity of having the same rule set a minimum standard for low quality and a minimum standard for high quality simultaneously has been lost on regulators. It was just two years ago that the same regulatory bodies issued a proposed QRM rule calling for 20% down payments and a demonstrated willingness to pay, along with other risk reducing standards.

QM/QRM will codify HUD’s view that the way to distinguish a prime loan from a subprime one is by the interest rate charged, not risk. Ignoring that it was HUD that led the self-described “revolution in affordable lending” that fueled the boom and bust; this distinction is self-serving since the FHA does not price for risk, and the Community Reinvestment Act (CRA), affordable lending mandates, and disparate impact rules effectively require that risk be ignored.

The result is that neither the QM nor the QRM definitions will mention minimum down payment or minimum standard for credit worthiness, two of the traditional three legs indicative of a lower risk loan. Under this bizarre definition, it appears a borrower can have no down payment, a credit score of 580, and a debt ratio over 50% so long as approved by a government-sanctioned underwriting system. Fannie and Freddie made such loans as recently as six years ago.

The Government Mortgage Complex will undoubtedly praise Mr. Bernanke’s sage judgment.

Booms are fueled by excessive leverage. QM/QRM will do little to limit borrower leverage and merely lay the foundation for the next bust.

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About the Author


Edward J.
  • American Enterprise Institute (AEI) resident fellow Edward J. Pinto is the codirector of AEI’s International Center on Housing Risk. He is currently researching policy options for rebuilding the US housing finance sector and specializes in the effect of government housing policies on mortgages, foreclosures, and on the availability of affordable housing for working-class families. Pinto writes AEI’s monthly Housing Risk Watch, which has replaced AEI’s FHA Watch. Along with AEI resident scholar Stephen Oliner, Pinto is the creator and developer of the AEI Pinto-Oliner Mortgage Risk, Collateral Risk, and Capital Adequacy Indexes.

    An executive vice president and chief credit officer for Fannie Mae until the late 1980s, Pinto has done groundbreaking research on the role of federal housing policy in the 2008 mortgage and financial crisis. Pinto’s work on the Government Mortgage Complex includes seminal research papers submitted to the Financial Crisis Inquiry Commission: “Government Housing Policies in the Lead-up to the Financial Crisis” and “Triggers of the Financial Crisis.” In December 2012, he completed a study of 2.4 million Federal Housing Administration (FHA)–insured loans and found that FHA policies have resulted in a high proportion of working-class families losing their homes.

    Pinto has a J.D. from Indiana University Maurer School of Law and a B.A. from the University of Illinois at Urbana-Champaign.

  • Phone: 240-423-2848
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    Phone: 202-419-5212

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