Welcome back, and hope your weekend was great !
There has been a humongous amount of buzz surrounding section 941 of the Dodd-Frank Act ("Wall Street Reform and Consumer Protection Act of 2010"), which requires, per the National Association of Realtors (NAR) website (Realtor.org), that lenders "securitize mortgage loans to retain 5% of the credit risk unless the mortgage is a qualified residential mortgage or is otherwise exempt (for example, FHA mortgages are also exempt)".
Why is this so scary?
The QRM definition is of extraordinary importance because it will determine the types of mortgages that will be generally available for borrowers for the foreseeable future. We look back at the NAR website, which says that the rule, "would (a) drive borrowers to FHA if they do not have 20% down or (b) mean those who couldn’t put 20% down would have to pay up to 3 percentage points more for a loan (for example, 8% mortgage vs. 5% mortgage) or not qualify at all. Even a 10% downpayment QRM would have a negative impact on FHA and the markets."
Let's get a little bit more granular on this, namely, how this affects new buyers and sellers looking to refinance their homes. This is very important.
Melanie J. McLane, a Real Estate Speaker and Trainer, says that stats from her trade organization, the NAR, indicates, "two striking things: 1) it will take the average buyer 16 years to save a 20% down payment, vs a 5%; and 2) the risk to the lender going from 95% LTV to 80% LTV is only 6/10 of one percent (less risky).". "The majority of home buyers do not have 20% to put down. Sellers are enlightened to offer creative financing due to low equity, a new attitude may emerge: "if I am about to lose my credit and home, of course you can take over my payments, forget saving 20% for down payment" What you may have as an end result is a nation of people taking over existing loans in lieu of obtaining new financing.", says Dean Wegner, a Mortgage Originator in Scottsdale, Arizona.
Jeffrey R. Kershner, Managing Broker/Principal with an Illinois Real Estate Company, takes an even granular approach, and says that for a person making "the median household income in Illinois of just over $53,000", that it will take them "9.24 years to save up for a required $40,000 down payment on a $200,000 house; that is with saving 10% after taxes per year. This will greatly increase the age by which first time buyers can enter the market and will adversely affect the middle class."
Substantial problems for new buyers, which would change the entire market.
For existing homeowners, per an article by Jon Prior on Housingwire.com, "an overwhelming percentage of homeowners located in states hardest hit by the housing downturn would be shut out of refinancing their mortgage because they do not meet equity standards under the proposed risk-retention rule", according to a study from consumer and industry groups. The story says that a white paper submitted to regulators, "showed existing homeowners would be harmed as well", since, "A borrower must hold 25% equity in the home in order to refinance into a QRM loan and at least 30% equity for a QRM cash-out refinance loan, according to the current proposal."
Where does this have it's biggest impact? In the story from Prior, he cites data from CoreLogic that, "showed the five states most impacted by the proposed equity requirements are Nevada, Arizona, Georgia, Florida and Michigan.", and says that home values dropped so much in these areas that the study "found two out of three homeowners in these states would not have the necessary 25% equity to refinance. The study also found six out of 10 would not be able to move out of the home and put 20% down on a new QRM." In Michigan, the study showed 64% of Michigan homeowners do not meet the 25% equity requirement, 66% in Florida, 65% in Georgia, 72% in Arizona, and the big one...Nevada...where 83% of homeowners, "do not have 25% equity in their home and would not be able – even if they had never missed a payment – to refinance into a lower-rate QRM loan."
Prior summarizes that, "In effect, the proposed QRM would penalize families who have played by the rules, scraped each month to pay their bills, kept their credit clean, and saved for a modest down payment," according to the study.
McLane feels that this is all due to that fact that we are, "over correcting from the early 2000’s when anyone with a pulse got a mortgage to an extreme on the other end now, where you can have perfect credit and offer up your first born child, and they still say either “no” or “maybe, we have to verify something else”. The banks are terrified of examiners, unknown parts of Dodd-Frank, etc.". Wegner feels that this is, "just another step backward for housing and adding to more years of recovery. We understand that risk prevention is critical for lenders going forward but knee-jerk reactions like this without fully understanding the implications are only going to hinder housing."
Suggestions? Wegner says that the real estate market needs, "expansion in the buyer pool to open more doors to prospective home buyers", and he suggests that they should focus on, "expanding programs to self employed borrowers", since, "1 in 3 Americans is defined as "self-employed" for underwriting purposes and therefore can not purchase a home." He rhetorically asks, "What if they allowed them to go "stated" with 50% down, 750 fico's, primary residence and single family only.", and says that this would easily boost housing 10%.
What are your thoughts? What would you suggest if you were able to chat with Regulators?
Have a Great Week, and Happy Rent-to-Owning !
Regards,
Rob Eisenstein
HomeRun Homes Blog http://blogging.lease2buy.com
HomeRun Homes Website http://www.lease2buy.com
TAGS: #QRM #NAR #QualifiedResidentialMortgage #FHA # mortgage
