The nation’s housing finance scheme has probably never seen such unrest… a cataclysmic crash sending the majority of private institutions either belly-up or running for the hills… the total failure of the massive government-sponsored enterprises… scores of bankrupt brokers… millions of foreclosures… it is an utter wasteland.Now that the smoke is slowly clearing, we are seeing the initial signs of a re-birth or sorts… a new housing finance scheme is emerging with the potential to address many of the most blatant errors of the past.
The Obama administration recently released their proposal to reduce the government’s footprint in housing finance by winding down the participation of Fannie and Freddie and constructing policy that would limit government involvement in mortgage lending.
One item cited in the Obama plan was the implementation of the “retained risk” provision of the Dodd-Frank Act and the creation of a “Qualified Residential Mortgage” (QRM) definition.
The “retained risk” provision mandates that originators or securitizers of mortgage securities retain 5% of a securities credit risk when sold to investors.
The QRM will provide a standard for underwriting that, if met, would exempt a security from the retained risk provision so long as the mortgages packaged into the security meet that standard.
One QRM provision that has been vigorously debated is the minimum down-payment to require from borrowers.
Some banks have supported 10% or less while other banks have been pushing for 20% or more but while their reasons for favoring one percentage or another could vary dramatically, their efforts to influence this part of the regulations are not necessarily driven by their altruistic urge create a more resilient housing finance scheme but rather to defend of their own competitive positions.
In any event, the 20% figure would likely strike the best balance between attainability and financial prudence and hopefully will be the level that prevails when regulators finalize the provision later this month.
Further, a 20% down-payment standard would represent a decisive shift away from the reckless lending days of the past and a significant turn in the direction of real prudence.
One important issue that will need to be answered after the adoption of the QRM is whether or to what extent the GSEs (Fannie, Freddie, etc.) and FHA will be bound by the standard as well.
