In his State of the Union address, President Obama said overlapping regulations were keeping “responsible young families from buying their first home.” He called for change: “Let’s streamline the process, and help our economy grow.” Banking regulators apparently agree, and by the end of summer may propose new rules to simplify the mortgage market.
Bloomberg News reports that by the end of August, regulators will release a “softer” version of rules overseeing how banks finance mortgages. The Dodd-Frank financial reform bill tasked regulators with writing rules that would force Wall Street to keep some skin in the game when they bundle mortgages into securities. Rather than letting banks pass all of the risk on to investors who buy the securities, the bill said banks must keep 5 percent of the deals on their own books.
In 2011, regulators released their preliminary proposal for defining the clunkily-named “Qualified Residential Mortgage,” which are loans that wouldn’t need to comply with the rule. The proposal said banks wouldn’t need to retain the risk on loans to borrowers who put at least 20 percent down or spend less than 36 percent of their income on debt payments (such as monthly mortgage and credit-card bills). That prompted a huge outcry from the mortgage industry and some consumer advocates, who said the new rules would make it hard for people to get loans. Now the agencies are on the cusp of issuing a final version of the rules that is less strict. Banks would need only to keep a slice of the loans for homeowners who spend at least 43 percent of their monthly income paying debts, as Bloomberg News reported.
This change brings the rules about mortgage securities closer in line to the other major change in mortgage lending—a related rule with the confusingly-similar name “Qualified Mortgage.” That new regulation comes from the Consumer Financial Protection Bureau, which outlined certain underwriting standards that, if banks follow, will provide lenders with protection from consumer lawsuits. It also uses the 43 percent limit as a cutoff point.
By aligning QM and QRM, the road map is clearer for banks. They can still make loans that don’t fit the standards, but those mortgages will likely be more expensive because banks will have to keep some of the risk on their books (through QRM) and will have greater potential exposure to lawsuits (through QM). It also means that borrowers who spend less than 43 percent of their income on debts will have an easier time getting loans.