Six regulators took to Capitol Hill Wednesday to consider the risk retention rule mandated by the Dodd-Frank Act, which will directly impact mortgage securitizations and the secondary mortgage market.
However, what caught the attention of mortgage professionals was the release of two alternate proposals for drafting an effective qualified residential mortgage standard (QRM). The QRM rule will dictate how much risk lending institutions are required to retain when offloading loans into securitizations.
Most expected a material softening from the original proposal of a 20% downpayment requirement for all QRM loans due to overwhelming opposition.
Regulators bent to market criticism and offered to completely remove the downpayment requirement for QRM in favor of harmonizing the rule’s standards with the QM rule.
Yet, regulators also went to the other extreme, including an alternate proposal that would require a 30% downpayment requirement in order to qualify as a QRM.
Compass Point Research & Trading Group policy analyst Isaac Boltansky is calling the 30% downpayment proposal a ‘red herring.’
"Once the rule goes out for comment, the pushback against the 30% downpayment proposal will be significant and sizeable," Boltansky said.
He added, "The call for mortgage credit availability was a unifier in 2011 and it will be again this time around, just more so since the downpayment threshold proposal will be 30% instead of 20%."
Some market analysts believe the 30% downpayment proposal is a regulatory compromise between the agencies because a minority of the regulators are advocating for stricter credit quality.
However, National Community Reinvestment Coalition chief program officer David Berenbaum pointed out that the alternative proposal will receive quite a bit of market disapproval.
"Clearly – the way it’s worded – the majority of those who endorsed the no downpayment rule believe that QRM equals QM, so it’s a win for the consumer and its also a way to jumpstart the economy," Berenbaum said.
He continued, "I believe that the [30% downpayment proposal] would violate the right to equal access to sustainable credit and affordable housing."
There are some market experts who believe the 30% downpayment proposal could be an alternative definition to the no downpayment option, but it should not be the core rule.
Based on value assessments, when a homeowner reaches an equity level of 30%, the loan historically performs well.
However, the challenge of trying to impose a 30% downpayment now is the existing economic environment, explained Ballard Spahr partner Richard Andreano.
"I think the thought of an alternative proposal happened because some regulators don’t believe that linking QRM to QM is perfect," Andreano stated.
He concluded, "However, adopting a sole approach that is higher than the original 20% downpayment would receive a lot of opposition because it fails to take into account that wages have simply not kept near the pace of home prices." He added that a downpayment requirement in line with 1950s levels is difficult to reach given the state of the current economy and wage levels across the country.
