QRM: Missing the Forest for the Trees, Posted by Gary : Voices of Real Estate
QRM: Missing the Forest for the Trees,
April 25, 2011 by NAR
Do you know what the leading cause of foreclosure is?
Survey says: Poor underwriting.
When a lender makes an unwise decision and gives a loan to a borrower with a poor credit history, that’s what leads to foreclosure. This is what happened with “toxic” subprime loans that required little, and even worse, no verification.
I make this point because a rule in the Dodd-Frank financial reform bill is stipulating that borrowers must make a 20-percent or more down payment in order to be deemed a “qualified residential mortgage” (QRM). If a mortgage isn’t labeled a QRM, then the lender must retain five percent of the loan risk.
If you’ve just taken a hard swallow, I’m with you. This rule, if implemented, will have widespread effects on the housing industry, especially during a fragile market recovery. And what’s worse, I think it’s missing the forest for the trees.
The data doesn’t show a link between down payment size and whether the loan performs well. FHA and VA loans boast low default rates. They also are the programs with the lowest minimum down payment requirements.
The QRM rule has good intentions. It wants to incentivize lenders to stay away from risky loans. I’m all for that. No one wants to see the housing market and our nation’s economy hit the crisis levels we saw back in 2008.
But a 20-percent down payment stipulation will have one result—even tighter credit than we’re seeing today. Borrowers will have an incredibly hard time getting a loan, and all for what? To save America from more foreclosures? Probably not. Because the data shows lenders should make decisions based on the whole picture of a borrower, not just how much money they can lay on the table.
And how many of us have that kind of cash lying around? The median cost of a home in Dallas, Texas, is about $160,000. You’d have to come to the table with more than $32,000 in your pocket. How many years would it take a family to save this much money living on an average salary of $40,000 a year? And that’s just for Dallas. What about consumers in high-cost areas such as California, New York, or Washington, D.C.?
Home ownership has built our nation and made it strong. We can still protect consumers and our national economy if we move forward with wise laws that take into account the whole forest, not just individual trees. – Gary Thomas, 2011 NAR First Vice President