Scotsman Guide - July 2011 Residential Edition

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BY DANIEL YEH, DIRECTOR OF MORTGAGE PRODUCTS

;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; At the beginning of May, much of New York City was outside cel- ebrating a stretch of beautiful spring weather. In the Marriott Marquis hotel in Times Square, however, a more somber mood was present as mortgage bankers discussed the future of their industry at the annual Mortgage Bankers Association (MBA) National Secondary Market Conference.

What’s a QRM?

The QRM can be broadly defined, as one conference speaker put it, as the “new private-label conforming loan.” In other words, QRMs will be considered the gold standard of mortgage loans in that financial institutions will not be required to hold any capital against QRMs for secondary-market transactions. For non-QRMs, financial institutions will be required to hold 5 percent of capital in a “vertical” or “horizontal” structure, which would make non-QRMs much more expensive and less attractive for them. A vertical structure means the institution would hold 5 percent against each tranche, whereas horizontal means it would take a first-loss position of 5 percent.

The current proposed definition of a QRM is a loan with the following characteristics:

1. Owner-occupied, one to four units,
fixed or adjustable rate

2. 28 percent front-end/36 percent back-end debt-to-income ratio and greater than 80 percent loan to value (LTV) for purchase loans, 75 percent for refinances or 70 percent for cash-out refinances

3. No 60-day delinquencies in the
past two years; no bankruptcies,
foreclosures or short sales in the
past 36 months
“As the definition currently stands,
according to [Federal Housing Finance
Agency] estimates, more than 80 per-
cent of the existing loans sold to the
government-sponsored enterprises
(GSEs) from 1997 to 2009 would not
be eligible as QRMs,” said MBA’s vice
president of research and economics
Michael Fratantoni (see chart). Setting
up such a narrow definition of the QRM
would make the majority of mortgage
products much more expensive, which
could have a significant impact on
an already fragile mortgage and hous-
ing market.

PERCENT OF ALL EXISTING MORTGAGES MEETING PROPOSED QRM REQUIREMENTS

More than 80 percent of existing loans would not be eligible as QRMs.

Year of origination

Source: Federal Housing Finance Agency

A reduced government role

Roughly 88 percent of the market was supported by Fannie Mae, Freddie Mac and the Federal Housing Administration (FHA) in 2010.

So far, government agencies have taken steps to reduce the government share of the mortgage market through broad changes to Fannie Mae and Freddie Mac, such as raising the govern-ment-guarantee fees and letting the temporary high-cost area loan limits revert to lower levels.

The Obama administration has made
it clear Fannie and Freddie will ultimately
be wound down and replaced by pri-
vate capital. The three proposals on the
table, set forth in the administration’s
report to Congress this past February,
each propose a privatized system of
housing finance with varying levels of
government assistance. According to the
report, the options include: