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Will Bureaucrats Prevent You From Buying a Home?

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Is the federal government about to make it more difficult for you to get a mortgage? Many people think so. Everyone from consumer advocates and human rights activists to banking industry trade groups to 320 members of Congress fear that an obscure little rule called “QRM” could price millions of Americans right out of the housing market.

“Here’s the most important point: the breadth of the groups involved in this coalition,” says Glen Corso, spokesman for the Coalition for Sensible Housing Policy, which represents groups as diverse as the American Bankers Association and the National Association of Human Rights Workers. “All the groups involved really see this as a pretty critical issue for credit access and availability.”

What’s This All About, Anyway?

The uproar concerns the government’s new definition of what constitutes a totally safe, plain-jane mortgage. Under the Dodd-Frank financial reform act, such safe mortgages (called Qualifying Residential Mortgages or “QRM”) can be sold to investors, like always.

But for riskier mortgages, new rules apply. When risky mortgages are bundled and sold as mortgage-backed securities, the people doing the bundling and selling (known in industry lingo as “securitizers”) would have to retain ownership of 5% of the loans.

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Why? Because under the old rules, mortgage lenders and securitizers made most of their money in upfront fees generated by selling mortgages to consumers, and then reselling those loans on the secondary market to investors. After they sold the loans, they had little reason to worry whether the people living in all those homes could actually afford to pay their mortgages, since all the default risk was handed over to investors.

As we know, many of those loans did fail, throwing the entire economy into the Great Recession of 2007.

The goal of the new rule is to force securitizers to retain some of that risk. If they have some skin in the game, the thinking goes, they naturally will start to care about whether the loans they sell and bundle can be repaid, since they’ll be on the hook for 5% of the potential losses.

“The secondary market is wonderful innovation, but it increased risk instead of mitigating it,” says Kathleen Day, spokeswoman for the Center for Responsible Lending.  ”This is intended to tackle the secondary loan market and wrestle it back down to earth.”

Almost everybody—federal regulators, bankers, consumer advocates—supports risk retention in principle. It’s nailing down the specifics that’s getting a little tricky.

“Getting the QRM definition right is vital. Too narrow a definition—limited to loans with very high down payments and high credit scores, for example—could significantly raise the cost of mortgage credit and reduce its availability for a large number of potential borrowers,” Mark Zandi, chief economist at the ratings agency Moody’s, wrote in a recent report. “Too wide a QRM definition could blunt the risk-retention rule’s ability to raise market confidence in securitization.”

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Image: Bill Ward, via Flickr.com

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