Lawmakers to consider reducing QRM down payment to 10%
Lawmakers in the House of Representatives are considering a push to lower the 20% down payment required for exemption of the recently proposed risk-retention rules on securitized mortgages. The House capital markets subcommittee held a hearing Thursday on the risk-retention rule proposed in March and its unintended consequences. The rule, approved by federal regulators, would require lenders to maintain 5% of the risk on mortgages pooled into securities. An exemption was also established. Any qualified-residential mortgage that has, among other requirements, 20% down would be exempt from risk retention. Critics of the rule claim the 20% down is too high, and that lenders wanting to avoid holding onto the risk would price out low- to middle-income borrowers and further constrict demand for an already struggling housing market. "I disagree that all residential mortgage loans will have to fall under the QRM. Risk retention is not meant to stop securitization. It's meant to make it more responsible," said Rep. Barney Frank (D-Mass.). "But there are arguments that 20% is too high of a number, and I'm willing to work with others on that." The feeling was nearly unanimous among those on the subcommittee. Rep. Spencer Bachus (R-Ala.) said the rule is contrary to the Treasury Department's recent recommendation to redesign the mortgage finance market and bring in more private capital to the market. "There are aspects of the rule that raise questions," Bachus said. The new acting director of the Federal Housing Administration, Bob Ryan, who was previously its chief risk officer, testified Thursday that an alternative definition for the QRM allows regulators to consider a 10% down payment instead. "We are concerned by the 20%. It may be too high. We are seeking feed back on the performance benefits of lowering it," Ryan said. Several trade and consumer advocacy groups wrote a letter to regulators this week asking for revisions to standards on the QRM to not lockout credit-worthy borrowers. "I fear it does not serve as a caution light but perhaps as an absolute stop sign," said Rep. Jeb Hensarling (R-Texas). "Any time you get the mortgage bankers, the mortgage insurers, the Center for Responsible Lending and Congressional Black Caucus to agree on something, maybe this committee should pay a little bit of attention." However, regulators at the hearing, including Michael Krimminger, general counsel for the Federal Deposit Insurance Corp., said not all homebuyers will have to meet the higher QRM standards. "On the contrary, we anticipate that loans meeting the QRM exemption will be a small slice of the market, with greater flexibility provided for loans securitized with risk retention or held in portfolio," Krimminger said. Federal Housing Finance Agency Chief Economist Patrick Lawler said lowering the QRM down payment to 10% would increase the share qualifying GSE loans in the market to 32% from 27%. He said these loans, however, would be much riskier. The 90-day delinquency rate on a loan with 10% down is consistently twice as high, Lawler said. "Concerns have been raised about the impact this standard would have on the availability or cost of finance for homebuyers who are unable to put down 20% of the purchase price," Lawler told the subcommittee. Kevin Schneider, CEO, of the mortgage insurer Genworth Financial (GNW) testified that many Americans would have to save up for more than a decade before being able to afford the 20% down payment. At a typical savings rate, he said, a family earning $50,000 per year would need 11 years to save up that down payment on a median-priced home of $153,000. Henry Cunningham, board member of the Mortgage Bankers Association, said if the current proposal is put into effect, millions of consumers would either put off buying or home or pay "unnecessarily high rates." "In the midst of a very fragile housing recovery, the government is throwing a devastating, unnecessary and very expensive wrench into the American dream," Cunningham said. Write to Jon Prior. Follow him on Twitter @JonAPrior.