QRM Restricts Credit and Adds Borrowing Costs, Senators Say

Over one-third of the current members of the U.S. Senate have written a letter to federal regulators urging they adopt a less restrictive definition of a qualified residential mortgage than has been formally proposed.  The bi-partisan group is led by Mary Landrieu (D-LA), Johnny Isakson (R-GA), and Kay R. Hagan (D-NC). The letter, addressed to the heads of the Federal Deposit Insurance Corporation, Office of Comptroller of the Currency, Federal Reserve Bank, Federal Housing Finance Agency, Department of Housing and Urban Development, and the Securities and Exchange Commission, is signed by 23 Democrats, 13 Republicans, and both independent senators. It urges the regulators to avoid restricting credit to middle class families who are saving to buy a home.

The Dodd-Frank financial reform act requires the originator of a residential mortgage to retain at least a 5 percent interest in that mortgage when selling it into the secondary market, a provision commonly referred to as "skin in the game."  Loans backed by FHA, VA, USDA, Fannie Mae and Freddie Mac will however be exempt from risk retention regs. For non-agency loans to meet the QRM definition and avoid being subject to risk retention regs, they must have down payments of 20% or more and a DTI of 28%/36% or less.

When Dodd-Frank was enacted, Landrieu, Isakson, and Hagan inserted an amendment which exempts suitably qualified mortgages (QRM), the definition of which was left up to regulators, from that 5 percent requirement.  The senators state that when they included the QRM exemption amendment in the Dodd-Frank Wall Street Reform and Consumer Protection Act that they were aiming to create a broad exemption from risk retention for historically safe mortgage products. The senators contend that they intended the exemption statute to require that the QRM definition be based on "underwriting and product features that historical loan performance data indicate result in a lower risk of default" and that they provided clear guidance on the types of factors that can be used including the documentation of income and assets, debt to income ratios and residual income standards, restrictions on negative amortization, balloon payments, prepayment penalties and the inclusion of mortgage insurance and features that mitigate payment shock.  The three senators who proposed the amendment said they intentionally did not include a rigid down payment requirement in the provision to ensure that creditworthy, qualified buyers could access mortgages with reasonable down payments.

The letter states that the proposed regulations go beyond what was intended in the statute by imposing down payment standards which it termed unnecessarily tight.  "These restrictions unduly narrow the QRM definition and would necessarily increase consumer costs and reduce access to affordable credit."  The senators said that well underwritten loans did not cause the mortgage crises and that the additional requirements proposed for QRM swing the pendulum too far and reduce the availability of affordable mortgage capital for otherwise qualified buyers.  Many will have to pay higher rates and fees and others may not be able to obtain a mortgage at all, the letter says.  The senators also criticized "overly narrow debt to income guidelines."