by. Henry Meier
Politics and mortgage lending are making for some strange bedfellows and, as usual, the biggest winners will be the big banks. In fact, when all is said and done and Dodd Frank is fully implemented it may end up that we love the sin of reckless mortgage lending; it’s just the sinners — those arrogant investment banks that brought us to the brink of a depression — that we don’t like.
First a little trip down memory lane. In the aftermath of the Mortgage Meltdown it seemed that everyone agreed that we had to do something about investment banks that were so anxious to cobble together mortgage-backed securities (basically bonds comprised of mortgages) that originators could sell them just about anything. The investment banks marketed these ticking time bombs which exploded when people defaulted on their mortgages. The solution was to mandate that securitizers have skin in the game. If they wanted to pawn off mortgages to investors then they should bear some risk.
As you all should know by now, Dodd-Frank requires lenders to underwrite to Ability to Repay Standards (ATR) . A special category of Qualified Mortgages (QM) gives lenders whose loans meet certain specific standards protection from lawsuits and foreclosure defenses. One acronym I haven’t talked about is the Qualified Residential Mortgage. Under Dodd-Frank, securitizers that purchase mortgages that aren’t Qualified Residential Mortgages (QRM) are required to keep 5% of the investment. These regulations are slated to take effect in final form in January of 2014.
Financial regulators, not including the CFPB (what a coincidence), are charged with defining what a QRM mortgage is. The first draft they came out with was surprisingly strict. For example, to qualify as a QRM mortgage borrowers would have to put 20% down on their mortgage loans and total monthly debt to income ratios could not exceed 36%.continue reading »