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.

    Tweet This

  • Booms are fueled by excessive leverage.

    Tweet This

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

    Tweet This

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.

Also Visit
AEIdeas Blog The American Magazine
About the Author

 

Edward J.
Pinto

What's new on AEI

Love people, not pleasure
image Oval Office lacks resolve on Ukraine
image Middle East Morass: A public opinion rundown of Iraq, Iran, and more
image Verizon's Inspire Her Mind ad and the facts they didn't tell you
AEI on Facebook
Events Calendar
  • 21
    MON
  • 22
    TUE
  • 23
    WED
  • 24
    THU
  • 25
    FRI
Monday, July 21, 2014 | 9:15 a.m. – 11:30 a.m.
Closing the gaps in health outcomes: Alternative paths forward

Please join us for a broader exploration of targeted interventions that provide real promise for reducing health disparities, limiting or delaying the onset of chronic health conditions, and improving the performance of the US health care system.

Monday, July 21, 2014 | 4:00 p.m. – 5:30 p.m.
Comprehending comprehensive universities

Join us for a panel discussion that seeks to comprehend the comprehensives and to determine the role these schools play in the nation’s college completion agenda.

Event Registration is Closed
Tuesday, July 22, 2014 | 8:50 a.m. – 12:00 p.m.
Who governs the Internet? A conversation on securing the multistakeholder process

Please join AEI’s Center for Internet, Communications, and Technology Policy for a conference to address key steps we can take, as members of the global community, to maintain a free Internet.

Event Registration is Closed
Thursday, July 24, 2014 | 9:00 a.m. – 10:00 a.m.
Expanding opportunity in America: A conversation with House Budget Committee Chairman Paul Ryan

Please join us as House Budget Committee Chairman Paul Ryan (R-WI) unveils a new set of policy reforms aimed at reducing poverty and increasing upward mobility throughout America.

Thursday, July 24, 2014 | 6:00 p.m. – 7:15 p.m.
Is it time to end the Export-Import Bank?

We welcome you to join us at AEI as POLITICO’s Ben White moderates a lively debate between Tim Carney, one of the bank’s fiercest critics, and Tony Fratto, one of the agency’s staunchest defenders.

No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.