October 2, 2013
Lifting a Shadow from Qualified Residential Mortgages
The self-named Shadow Financial Regulatory Committee of the American Enterprise Institute has issued a statement on The New Qualified Residential Mortgage Rule Proposal. The Shadow Committee argues that agencies promulgating the newest version of the QRM rule
completely abandoned the Act’s requirement for a separate high-quality QRM. Instead, they proposed a QRM that was essentially the equivalent of the QM. This not only violated the congressional intent and nullified the retainage, but it pushed the US mortgage system back toward the very policies that fed the housing bubble, the mortgage meltdown and the financial crisis. It responds to those want the mortgage finance system to make mortgage credit widely available, but it ignores the need for a stable system that will avoid a future crisis. (2)
This is not fully accurate. The QRM proposal does not violate congressional intent because Congress merely stated that the QRM be “no broader” than the QM. (Dodd-Frank Act Section 941) There is also a fair amount of fear-mongering here because the Shadow Committee does not propose how we can responsibly balance credit availability with systemic stability.
Nonetheless, the Shadow Committee is right to note that the rules governing mortgages must balance a number of competing goals.
When the proposed rule was released, I had written that it should incorporate a “benefit ratio” which
compares “the percent reduction in the number of defaults to the percent reduction in the number of borrowers who would have access to QRM mortgages.” (20) A metric of this sort would go a long way to ensuring that there is transparency for homeowners as to the likelihood that they can not only get a mortgage but also pay it off and keep their homes.
A benefit ratio would not only help ensure that homeowners received sustainable mortgages, but it would also address the systemic concerns raised by the Shadow Committee. This is because the benefit ratio would protect lenders from their own worse instincts as they lower their underwriting standards in pursuit of increased market share in a booming market.
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