“Dodd-Frank” may have the same bone-chilling effect on mortgage lenders’ ears as the theme from Jaws does for the average moviegoer’s – but unlike the latter, lenders don’t know exactly what’s coming next when it’s heard.

Last week, for example, the FDIC laid out its proposal for the definition of a “qualified residential mortgage” (QRM), three little words included in the gigantic bill on which the fate of the American mortgage market could hang.

One of Dodd-Frank’s provisions requires lenders to retain 5 percent of the risk of the loans they finance, unless such loans are qualified residential mortgages. The idea was to force banks to keep some skin in the game when offering potentially higher-risk loans, but still allow plain vanilla, traditional offerings at lower rates as long as they conformed with federal rules.

But the financial reform legislation doesn’t spell out exactly what a QRM is. That’s the task with which regulators are now set, and the FDIC recommended a stringent standard which would require borrowers to contribute a 20 percent down payment. Several other federal agencies now have a few days to decide whether to endorse the FDIC’s proposal.

Local housing lenders and advocates worry that a too-strict definition will price many buyers out of the market.

“If I have to keep more money on my books [as a bank], then I’m going to charge more money to make up for the potential losses on this loan,” said Thomas Gleason, executive director of MassHousing. “So if [the rule] comes out and it’s aggressively restrictive, it’s going to be a problem in the Massachusetts market.”

Priced Out

Housing market experts said if the final definition of a QRM includes the 20 percent down provision, it could hit states with higher-than-average housing costs – like Massachusetts – hard. In 2010, the median price for a single-family home in the commonwealth was $295,000, according to data obtained from The Warren Group, publisher of Banker & Tradesman. A 20 percent down payment on that average home would come in at $59,000 – a sum that would preclude many borrowers from qualifying for a low-rate, conventional loan.

“We generally feel like requiring a 20 percent down payment and making the definition [of a QRM] narrow, would be very, very harmful to the local market, not just to the banks, but to the overall real estate market,” said Jon Skarin, director of federal regulatory and legislative policy for the Massachusetts Bankers Association. “You would really have a very limited number of borrowers out there, and in terms of moving people into the market to buy homes, I think that would have a very, very significant, negative impact on the market.”

The impact would be particularly high in a low-interest rate environment like the current one, when banks are eager to sell loans on to the secondary market rather than tie up capital.

“[Banks] want to be able to offload those loans without having to hold a lot of additional capital,” Skarin said. “The more capital they hold, the fewer loans they can make.”

And tight QRM standards could push even more buyers into loans offered by the Veteran’s Administration, Federal Housing Administration, and United States Department of Agriculture, federal agencies explicitly exempted from risk-retention rules by Dodd-Frank.

Fannie Mae and Freddie Mac have also been exempted from the rules – but only so long as they remain in government conservatorship. Together, Fannie, Freddie and the FHA have been making more than nine of 10 purchase loan offers nationwide, according to reports.

Since the housing bust, the FHA’s share of the mortgage market has skyrocketed from a few percent to more than a third of the market, according to the Mortgage Bankers Association, and is especially popular with first-time buyers. Housing experts worry that new QRM rules and tightened government underwriting could push even more people into affordable housing products like those offered by the FHA, MassHousing and the Massachusetts Housing Partnership, potentially straining the resources of those programs and nudging traditional banks aside.

Everyone’s Unhappy

High loan-to-value loans with smaller down payments can be successful, said Gleason, “But you’ve got to do it the old-fashioned way. You’ve got to underwrite the mortgage, you’ve got to verify income, you’ve got to verify jobs, you’ve got to verify assets. You actually have to do the math.”

The Massachusetts Housing Partnership already requires partnering lenders to agree to hold at least 20 percent of the risk of the loan, according to Executive Director Clark Ziegler, who said the organization’s loans have performed well during the downturn. But he still has some concerns about moving too abruptly to a tight QRM definition, especially since most first time buyers can’t come up with even a 10 percent down payment.

“To instantly pull the rug out would devalue real estate, because you’re limiting the number of potential buyers,” Ziegler said. “We have a fragile market to begin with, where prices are bouncing along the bottom. If we were to suddenly change the rules of the game so that buyers who are credit-worthy, but can only put 5 percent down or 10 percent down, can’t qualify, I think the consequences are huge. But carving out Fannie Mae and Freddie Mac would address most of that problem.”

But Mass Bankers’ Skarin was less sanguine about the potential of a GSE exemption to keep the market running smoothly.

“What happens after [the GSEs] are gone, or their mission changes somewhere down the road?” he asked. “Writing the rule as agnostic with whom [a bank] is selling to….I think would be a better course of action for the regulators.”

The FDIC has extended the final rulemaking deadline to allow for 60 days of public comment for industry groups and others to weigh in with specific concerns, and they’ve specifically asked for comment on whether loans with less than 20 percent down payments, but accompanied by private mortgage insurance, could also meet the QRM definition. That’s a solution many in the industry are hoping for.

Either way, there’s sure to be a lot of comments.

“What do they say? ‘If everyone’s unhappy, you’ve done the right thing?’” Skarin said. “Well, everyone’s going to be unhappy.”