Fear and loathing of the QRM

I’ve been spending more time lately listening to the messages our industry, government regulators and other interested parties have been sending out through the media as the industry settles into the new dry-dock that is Dodd-Frank. As the business goes through this retrofit, many parties will attempt to influence what changes get made and how closely the future state of the home finance industry mirrors what the many writers of the Wall Street Reform and Consumer Protection Act originally envisioned. Someone should be paying attention to this and harvesting some great material for a future horror movie. I don’t have to tell you how serious the situation is. The potential exists to change everything we know (or think we know) about the mortgage lending industry and do so in the name of protecting the borrowers lenders are tasked with serving. It’s funny, then, that much of the rhetoric we’ve been hearing up until now has little, if anything, to do with the actual borrower and more to do with the deals that will eventually qualify to be funded. That debate is centered around the concept of the qualified residential mortgage, something that has yet to be defined but has everyone vying for a chance to put their two cents into the definition that ultimately emerges. Right now it’s like the QRM is sitting in the middle of dark room. No one knows exactly what it looks like, so it takes on the qualities of our deepest fears. Most recently, the fear has coalesced around the down payment. Just how high can we make it without breaking the system — or creating one that won’t work? A recent story on HousingWire indicates that some are concerned that federal regulators might put the down payment bar for a QRM at 20% or more, an idea that doesn’t sit well with industry players quoted in the story. While the secret government sources (always a scary concept) starting these rumors flying are not revealed, it’s an excellent opportunity for the industry to share their fears. When Cameron Findlay, LendingTree’s chief economist, talks about home prices eroding another 30% and the nation’s homeownership ranking falling to below 64%, it makes the imagined impact all that much more horrifying if you leave out the fact that some lenders might actually offer programs that would mitigate this risk by finding innovative ways to manage that 5% risk retention required under Dodd-Frank for loans that don’t qualify for QRM status. Lenders can offer any loan program they want at any price they want as long as they retain 5% of the risk for any loans written outside of the guidelines and don’t violate any of the other yet-to-be-written rules. The story is just better if you leave that part out (something HousingWire’s Kerri Panchuk didn’t do, mind you, and still wrote a good story). I mean, if you’re going to scare a little kid by telling him that he’ll die of asphyxiation if all of the air suddenly got sucked out of the room, it will work better if you don’t tell him he can go into the next room and be fine. Of course, we have to accept the fact that there may be no next room when it comes to mortgage lending and risk retention. As HousingWire publisher Paul Jackson pointed out so well, it’s all about money and if lenders can find a way to make money without retaining any risk, they will most certainly do so. And don’t forget, anyone from outside of the system who tries to come in and offer non-QRM loans will still have to deal with an entirely new system of federal government regulation and oversight. Ultimately, those who have the most to say about how the QRM will be defined aren’t even working on the problem yet. The Consumer Financial Protection Bureau is sucking up bureaucratic talent like a black hole eating stellar gas, smashing them out of former roles in other agencies as it restructures them into a new Borg-like* lattice that will be the new primary industry regulator. It could be a year before they even begin making rules. That’s plenty of time for folks to come up with some very scary scenarios. *Borg is a reference to the Star Trek fictional universe and refers to a race of half-human, half-machine entities that act as a single being, rolling up everything into one giant construct. Rick Grant is veteran journalist covering mortgage technology and the financial industry. Follow him on Twitter: @NYRickGrant