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How the QRM Fits in the QM Reality

American Bankers Association American Escrow Association American Financial Services Association American Land Title Association American Rental Property Owners and Landlords Association Asian Real Estate Association of America Black Leadership Forum Center for American Progress Center for Responsible Lending Colorado Mortgage Lenders Association Community Associations Institute Community Home Lenders Association Community Mortgage Lenders of America Community Reinvestment Coalition of North Carolina Consumer Federation of America Consumer Mortgage Coalition Council Of Federal Home Loan Banks Credit Union National Association

Enterprise Community Partners, Inc. Habitat for Humanity International HomeFree USA Homeownership Preservation Foundation Independent Community Bankers of America International Association of Official Human Rights Agencies Leading Builders of America Louisiana Bankers Association Mortgage Bankers Association Mortgage Insurance Companies of America NAACP National Association of Federal Credit Unions National Association of Hispanic Real Estate Professionals National Association of Home Builders National Association of Human Rights Workers National Association of Neighborhoods National Association of Real Estate Brokers

National Association of REALTORS® National Association of the Remodeling Industry National Community Reinvestment Coalition National Fair Housing Alliance National Housing Conference National NeighborWorks Association National Urban League National Real Estate Investors Association North Carolina Institute for Minority Economic Development Real Estate Services Providers Council Real Estate Valuation Advocacy Association The Realty Alliance Texas Bankers Association U.S. Conference of Mayors Worldwide ERC

Presented by the COALITION FOR SENSIBLE HOUSING

POLICY

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Origins of QM & QRM

The Dodd-Frank Wall Street Reform and Consumer Protection Act(Dodd-Frank Act) required regulators to create two new mortgage classification rules. One imposes a requirement on originators to underwrite loans with an eye toward the consumer’s ability to repay the loan, while the other is an investor protection rule that would require issuers of mortgage-backed securities (MBS) to retain part of the credit risk associated with certain mortgages underlying the securities.

QM was designed to protect consumers from unsustainable loans.The QRM rule was designed to protect investors by effectively limiting mortgages to traditional products. These rules should be aligned, as the objectives are consistent: safe loans for borrowers perform well for investors.

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Ability to Repay Requirement (QM Rule)

Mandated by Dodd-Frank, the Ability to Repay rule is intended to protect consumers against risky and unsustainable mortgage loans.

The Consumer Financial Protection Bureau (CFPB) recently issued the final rule, which required originators to confirm a consumer’s ability to repaythe mortgage by looking at specific criteria, including verified income and assets. The final rule also excluded the risky loan terms most closely associated with the housing crisis, including:

•“No doc” loans

•Negative amortizing loans

•Interest-only loans

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QM Rule, Cont.

The rule also set a maximum “back end” debt-to-income ratio of 43% and limited the safe harbor to prime loans, ensuring that loans with low downpayments will have strong compensating factors. The rule does contain a temporary exemption from the DTI requirement for loans eligible for purchase, guarantee or insurance by federal government agencies or the GSEs. These agencies’ underwriting engines incorporate compensating factors.

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Risk Retention Requirement (QRM)

The risk retention rule is designed to protect investors by ensuring that issuers stand behind the products they are securitizing, and would require issuers of MBS backed by loans falling outside an established safe definition to retain 5% of the risk associated with those loans.

Dodd-Frank created the QRM as an exemption from risk retention for loans that are well underwritten, fully documented and that do not contain risky loan features (negative amortization, payment shock, etc.). Not knowing what exactly the QM rules would say, Dodd Frank required that this definition be no broader than the credit box established under the QM rule

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QRM Should Equal QM

Harmonizing the two rules, i.e. making the QRM standards equal to theQM standards, will ensure that safe and sound lending protections are putin place, but without unduly restricting the housing market from efficiently accessing private capital. Failure to synchronize these rules will entrench the market’s current dependence on government-backed lending as private- market mortgages will be more expensive.

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QM is Safer than Traditional Prime Mortgages

Existing loans that meet the QM requirements have performed extremely well, even through the recent financial crisis.

Moreover, the safe harbor provided by the final QM rule applies only to loans whose APR is less than150 basis points above the Average Prime Offer Rate. This restriction means that QM loans cannot have significant risk, and will ensure that QM loans with high LTVs will have strong compensating factors.Citation: Roberto Quercia, Lei Ding, and Carolina Reid (2012). "Balancing Risk and Access: Underwriting Standards forQualified Residential Mortgages," UNC Center for Community Capital Research Report, January 2012. This analysis utilizedthe QM product restrictions but not the DTI restriction.

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Risk Retention Is Costly to the Consumer; Even More So at 90 LTV

Various estimates indicate that non-QRM loans will be significantly more expensive than QRM loans.Citation: Moody’s Analytics, ASF, Morgan Stanley, Amherst, NAR, MBA.

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90% LTV Tradeoff: Higher Rates or Longer Wait to Build Downpayment

The QRM rule falls hardest on everyday Americans, with first-time homebuyers and families of color being especially impacted. The dream of homeownership will become a mirage for many would-be homebuyers, despite their ability to obtain a safe and affordable QM loan.* Note: CRL Calculations based on 2010 ACS and BLS median Income. Calculations include years required to save for downpayment and closing costs.

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A 90% LTV Excludes Along Racial Lines

Citation: Roberto Quercia, Lei Ding, and Carolina Reid (2012). "Balancing Risk and Access: Underwriting Standards for Qualified Residential Mortgages," UNC Center for Community Capital Research Report, January 2012.

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Raising the LTV Requirement from 80% to 90% Still Impacts 31% of the QM Market

Risk retention based in large part on downpayment requirements is not necessary for loans that fall within the QM credit boxin light of the significant safety features imposed on mortgages via the final rule.

DownpaymentImposing a downpayment requirement of 10% will require risk retention for 31% of the QM-eligible market, or else channel these loans through government sources via the carve-out provided for the GSEs and the FHA.

Following the proposed QRM rule and imposing a downpayment requirement of 20% would require risk retention for61% of the QM-eligible market, resulting in higher costs to borrowers and increasing government involvement in housing.

Citation: Roberto Quercia, Lei Ding, and Carolina Reid (2012). "Balancing Risk and Access: Underwriting Standards for Qualified Residential Mortgages," UNC Center for Community Capital Research Report, January 2012. This analysis utilizedthe QM product restrictions but not the DTI restriction.

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Higher Cost Will Drive Non QRM Borrowers to ‐Government-Backed Loans

The QRM exemption for loans secured or insured by the federal government will channel the market toward government-backed loans, going against the stated policy goals of Congressional leaders, Administration officials and both industry and consumer advocates, to reduce the government’s footprint.

Source: NAR analysis of LPS data

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Best Solution for Consumers and Investors

• QRM was conceived to protect MBS investors against poor underwriting, sloppy or non-existent documentation, and toxic mortgage products (2/28s, Neg Am) that often went undisclosed.

• QM has reformed the mortgage market in such a way as to ensure that borrowers can afford to repay their mortgages using reasonable debt-to-income ratios, by requiring full documentation of income and assets and by eliminating many risky loan features, thereby reducing the risk of default. 

• Although designed for a different purpose, the QM addresses the same risks that gave rise to the QRM.  The result of CFPB’s work is that loans that meet QM standards will also be safe for investors, and securities based on these loans will be transparent for them.

• Thus, to protect investors, safeguard consumers, and preserve continued access to affordable mortgage credit, the QRM should equal the QM.