Wednesday, August 24, 2011

QRM's: The latest threat to the US economy?

What is a QRM? A QRM is a Quality Residential Mortgage product created by the Dodd-Frank financial reform bill. QRM's, in theory, are being developed to prevent future economic crisises brought on by mass defaults on residential mortgages. Defaults on mortgages are to blame for the "Great Recession" the world has been experiencing from 2005 to present.

No one is arguing with the fact that underwriting standards for home mortgage loans became so lax that those who had no business buying a home qualified for and obtained mortgage financing.

The Frank-Dodd legislation will reguire that the originators of loans maintain some risk along the way so they won't be so quick to hand a "ticking timebomb" to some unsuspecting investor (i.e. bankers, investment firms etc). A reasonable requirement at first blush. Let's examine this further however.

Initially, it was thought that a 20% down payment would be required by the borrower to qualify as a QRM. Banks would be allowed to offer more riskier loans of course....yet higher interest rates would be required to shoulder some risk in each loan. The QRM would be the standard and borrowing costs for other loans would be higher. (Some experts predict the difference between the two types of loan cost could be as high as 3%!) Other proposed QRM provisions include: a debt to income ratio <=28%, no more than two 30 day late payments.

With housing being a significant force driving the national economy its understandable why many economic experts, financial gurus, banks, and realtors are quite concerned that the QRM standards could significantly reduce the number of real estate transactions at a time when the economy needs them the most. Are QRM's an over-reaction to the mortgage crisis? Many concerned citizens feel that they are.

No one denies that loan underwriting standards must be more realistic and stricter than the standards of the late 90's and first half of the 2000's yet has the pendulum now swung too far in the opposite direction? Many believe it has, since hard working people with good credit are now being turned away. If the QRM legislation requires 20% down this could be enough to put the country in a double dip recession.

The reality is that a 20% down payment would be a hardship for many hard working buyers with great credit scores. Some experts have guestimated that it typically would take a good 15 years for a first time buyer to save up the 20% to buy in high priced metropolitan areas such as the Washington, D.C..

Similarly, the FHA's conforming loan limit of $729,750 is expected to drop to $625,500 in the fall. High priced housing markets will feel the repercussions from this change as sellers and buyers struggle to negotiate their way to the settlement tables.

Its a good time to call your local congressional representatives and let them know how you feel about the proposed QRM legislation. Every voice counts when the stakes are as high as they are!

Keep in mind that according to a recent article in the Washington Post "about 90% of the home loans written these days are guaranteed by Fannie Mae, Freddie Mac or the Federal Housing Administration. The remaining 10% are loans didn't qualify under the Fannie Mae, Freddie Mac, or Federal Housing Administrations underwriting guidelines and are part of the originating banks portfolios. Currently, a majority of investors, are not generally interested in purchasing the mortgages not backed by the federal government. Can we blame them?

If you'd like to make the most of your real estate experience call me today- Your transaction will be treated as if it were my own!


Carla Brooks

PS All photos displayed in this post are from

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