Few initials are so achingly dreaded in the current banking market as QM and QRM.
Since being dreamed up by Congress in the aftermath of the housing collapse, “Qualified Mortgage” and “Qualified Residential Mortgage” rules have been the subject of fevered conjecture and foreboding. Banking industry executives say the tweaking of mortgage underwriting rules by politicians leaves much to be desired and could leave many prospective borrowers out in the cold.
Some of those borrowers probably deserve to be shut out, and if Congress can take credit for ending “predatory lending,” it will. But the threat of severe enforcement action and the labyrinthine relationship between the QM and QRM standards could put a chill on lending just as it’s beginning to show signs of a pulse.
The Consumer Financial Protection Bureau says it expects to release final QM and QRM rules “soon.”
For Jennifer Manning, senior vice president of mortgage operations at Salem Five Mortgage Co. LLC, putting QM and QRM in practice today would bring the home lending market back to “a strictly vanilla product.”
There would be no leeway for industry professionals to tailor, adjust or otherwise customize loans based on the needs or shortcomings of individual borrowers, Manning said.
“It doesn’t take a lot of factors into account. It’s like lending in the early ‘90s. It’s almost like we’re going back to that… all of the initiatives that have developed over the years would be gone,” Manning told Banker & Tradesman.
For example, interest-only loans were the subject of pointed criticism from politicians after the collapse, but because those loans were the “cause of some unjustness” as the bubble inflated, doesn’t mean they do not serve a legitimate purpose today, Manning said.
“Today, interest only (customers) are some of our highest-quality borrowers,” Manning said.
Manning said QM and QRM are a political attempt to put the freewheeling, look-the-other-way regulatory scene “Barney Frank pushed” away. “It’s a clear case of people who may not have had a lot of lending experience, or formal experience of lending, wrote the legislation. Now, it’s ‘how many tweaks can we make at the end to sort of save face?’”
Government Takeover?
Broadly, QM is an “ability to repay” rule, and has been characterized by industry advocates as a government takeover of loan underwriting standards.
QRM is a risk retention rule that requires lenders to keep 5 percent of any loan that doesn’t meet QM’s underwriting standards on their books. Exceptions are made for loans sold to Fannie Mae or Freddie Mac.
Salem Five Mortgage is one of the largest home lenders in the state, and its lending totals adhere to a pattern followed by other top Massachusetts mortgage companies. It wrote nearly $763 million in home loans – both purchase and refinance – last year, about $977 million in 2010, $1.1 billion in 2009 and $453 million in the doldrums of 2008, according to data compiled by The Warren Group, publisher of Banker & Tradesman.
Last year, Salem Five Mortgage wrote nearly $103 million in residential Adjustable Rate Mortgages (ARM). It wrote $98 million in ARMs in 2010, about $93 million in 2009 and $29 million in 2008.
Not all of those borrowers made a down payment of at least 20 percent. Not all of them could provide two years of income verification. That’s where a bank’s loan officers, managers and underwriters come in.
They’re the folks top executives in community banking are picturing when they tout their institutions’ ability to work with customers, customize products and build and maintain lasting relationships.
So, a borrower doesn’t have 20 percent for a down payment, but he’s been an account holder for decades and his small business is a customer of the bank, too. The fear is that under the new rules, that customer, and the bank, will be out of luck. It won’t be because the bank won’t be allowed to lend to that customer, it’ll be because the risks for lenders in the event that a loan like that goes sour are too great.
Encouraging Court Cases
“The biggest fear is the legal liability risk,” Jon Skarin, executive vice president of the Massachusetts Bankers Association, told Banker & Tradesman. “The biggest fear is the legal liability risk. If a borrower feels they’ve been wronged, why wouldn’t they go to court?”
As it stands, QRM allows troubled borrowers to challenge a lender’s underwriting. “So, six months, two years down the road, a borrower loses his job, or gets divorced, there’s no way a bank could (predict) that,” Skarin said.
Instead of a last resort, QM and QRM seem to make court a good place to start.
Rod Alba, vice president of mortgage finance and regulatory counsel at the American Bankers Association, said at a recent conference that as-is, the new rules practically funnel mortgage disputes and regulatory enforcements directly to court.
And it may also funnel borrowers who would typically go to a bank or mortgage company for a home loan toward lenders of weak repute.
MBA members “are doing the type of underwriting that was envisioned in the legislation,” Skarin said. “It’s market rate, it’s tied to income. But if you’re working with a borrower who’s a good customer with a good payment history, if there’s a bright line that says if you go outside of this, there’s not going to be a market for these people getting mortgages going forward. They will go elsewhere, and they are they really getting treated fairly?”
What’s got the industry worried now, though, is the mystery surrounding how QM and QRM will look when finalized in the next couple of months.
“There’s no indication of what’s going to happen next,” Skarin said. “QM is something (banks) can live with. QRM is going to push a lot of loans into risk retention that may not really need it.”
