PARAMOUNT MORTGAGE - LENDER'S BLOG

Sen. Johnny Isakson (R-Ga.), along with Senators Mary Landrieu (D-La.) and Kay Hagan (D-N.C.), authored the Qualified Residential Mortgage (QRM) provision of the Dodd-Frank financial reform bill.

On February 15th the administration unveiled its plan for reforming America's housing finance market and affirmed the QRM provision.

But concerns have been raised, according to Senator Isakson, “that regulators may propose an entirely unnecessary large down payment [of 20%] for borrowers to meet the definition of a Qualified Residential Mortgage.”

“This is not what we intended,” the Senator stated on The Hill website. “We sought to curtail lax underwriting standards and risky products by lenders, not to penalize credit-worthy borrowers seeking homeownership. In fact, we debated and specifically rejected a minimum down payment standard for the Qualified Residential Mortgage.”

Mortgages that meet the Qualified Residential Mortgage definition must have verifiable and documented borrower income, underwriting and LTV ratios must be consistent with statutory and regulatory requirements, and the total points and fees payable can not exceed three percent of total loan amount.

Qualified Residential Mortgages would be exempt from the risk retention requirements of the Dodd-Frank law, thereby providing an incentive for lenders.

“Simply put, a large down payment is not the most effective gauge of whether or not the borrower will pay their mortgage. This is precisely why prudent underwriting was at the center of our amendment,” continued Senator Isakson.

“First-time home buyers make up 41 percent of the home-buying population. The 20% down payment can be a large barrier for them to buy a home.

“It is also unnecessary. An analysis of loan performance over the past decade proves that low down payment homebuyers, when properly underwritten, have a relatively low risk of default when compared to the high-risk products and underwriting standards that led to the market meltdown.”

A Qualified Residential Mortgage borrower must have mortgage insurance or other credit enhancements that reduce the risk of default. Research has shown that including mortgage insurance on low down payment loans reduces the frequency of borrower default, as well as the severity of losses incurred by lenders.

Senator Isakson wants regulators to “draft a responsible framework to support our nation's housing recovery” and to “provide an incentive for lenders to originate prudently underwritten loans while avoiding increased costs to homebuyers.”

Arbitrarily tossing in a new requirement for a large down-payment will hinder, rather than help, that effort.

QRM rules will be finalized in 2011 and become effective in 2012.