RTC Mortgage Blog

Watch Out For QRM

April 29th, 2011 12:49 PM by Richard T. Cirelli

Watch Out for QRM…


QRM stands for Qualified Residential Mortgage. You will be hearing a lot more about it in the coming months and it’s not a good thing for Borrowers Realtors, Mortgage Originators or anyone else connected with the real estate and mortgage businesses.


Here’s what is happening….. A provision in the recent Dodd-Frank reform legislation is making it a requirement that mortgage lenders – banks and non-banks alike – either make loans that meet the definition of a QRM or put aside a  reserve of 5% of the every mortgage they make to offset the risk that some loans may default in the future.


How will they define a QRM?


This is still being debated and when congress reconvenes in late July the expert opinion is that a QRM loan (a loan that will not require the lender to establish a reserve) will:


·         Require 20% minimum down payment for a purchase transaction,

·         Require 25% equity to refinance

·         Abolish 2nd mortgages 


Nearly all lenders sell their mortgages to Fannie Mae and Freddie Mac, so they can get their money back and re-lend to more homebuyers and owners. In fact, Fannie, Freddie and FHA now account for over 90% of the nations mortgages. Now the Government seems to be frantically trying assure that they will never make another bad loan. Yet, we all know that there are more houses for sale than buyers. And, credit is already too tight. Here are some statistics:


An FHFA (this is the Government Agency that oversees Fannie and Freddie) study released last month found:


·         90-day delinquency rates for loans originated 1997-2003 ranged between 2.50% and 3.00% for all loans

·         QRM-equivalent defaults during that same period ranged 0.31% to 0.55%, but represented only 20% of all loans.

·         By 2009, standards had so greatly tightened that all new purchase loans had only a 0.30% default rate, and the QRM fraction was an almost non-existent 0.07%.


So, why do we need to do anything more such as QRM, to protect the world from bad mortgages? It’s already done!


I fear that more Government intervention in the way of QRM will:


·         Eliminate competition by forcing the smaller non-bank lenders out of business because they can’t afford the 5% reserve

·         Eliminate the first-time home-buyers because the minimum down payment will be 20%

·         Eliminate Private Mortgage Insurance Companies (PMI) because they are in the business of insuring the lenders if a borrower buys a house with less than 20% down, and

·         Exacerbate the already weak housing market.


I’d love to hear your thoughts?


Mortgage Rate Update:


This week was potentially volatile for rate-watchers. The Fed was holding one of their eight regularly scheduled meetings to decide the future of the Fed Funds Rate and Fed Chairman Ben Bernanke was holding the first-ever press conference after a Fed Meeting. AS you can imagine, Stock, Bond and Mortgage-Backed Securities traders were nervous. What would Ben say and how would it affect the markets? Why would he hold a press conference when its never been done before? Well, he really didn’t say anything new and the markets remained calm.


Rates over the past few weeks have come down a bit and are extremely attractive. See the chart below for examples.


For more information, please visit our website: http://www.rtcmortgage.com/

Posted in:General
Posted by Richard T. Cirelli on April 29th, 2011 12:49 PM



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