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Editor: David Reiss
Cornell Law School

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July 28, 2015

Optimizing Mortgage Availability

By David Reiss

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The United States Government Accountability Office (GAO) has issued a report, Mortgage Reforms: Actions Needed to Help Assess Effects of New Regulations. The GAO did this study to predict the effects of the Qualified Mortgage (QM) and Qualified Residential Mortgage (QRM) regulations. The GAO found

Federal agency officials, market participants, and observers estimated that the qualified mortgage (QM) and qualified residential mortgage (QRM) regulations would have limited initial effects because most loans originated in recent years largely conformed with QM criteria.

  • The QM regulations, which address lenders’ responsibilities to determine a borrower’s ability to repay a loan, set forth standards that include prohibitions on risky loan features (such as interest-only or balloon payments) and limits on points and fees. Lenders that originate QM loans receive certain liability protections.
  • Securities collateralized exclusively by residential mortgages that are “qualified residential mortgages” are exempt from risk-retention requirements. The QRM regulations align the QRM definition with QM; thus, securities collateralized solely by QM loans are not subject to risk-retention requirements.

The analyses GAO reviewed estimated limited effects on the availability of mortgages for most borrowers and that any cost increases (for borrowers, lenders, and investors) would mostly stem from litigation and compliance issues. According to agency officials and observers, the QRM regulations were unlikely to have a significant initial effect on the availability or securitization of mortgages in the current market, largely because the majority of loans originated were expected to be QM loans. However, questions remain about the size and viability of the secondary market for non-QRM-backed securities.

This last bit — questions about the non-QRM-backed market — is very important.

Some consumer advocates believe that there should not be any non-QRM mortgages. I disagree. There should be some sort of market for mortgages that do not comply with the strict (and, in the main, beneficial) QRM limitations.

Some homeowners will not be eligible for a plain vanilla QM/QRM mortgage but could still handle a mortgage responsibly. The mortgage markets would not be healthy without some kind of non-QRM-backed securities market for those consumers.

So far, that non-QRM market has been very small, smaller than expected. Regulators should continue to study the effects of the new mortgage regulations to ensure that they incentivize making the socially optimal amount of non-QRM mortgage credit available to homeowners.

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