Non-Agency Lending To Be Limited by QRM Rules: The Debate

Unlikely bedfellows of the Mortgage Bankers Association and the Center for Responsible lending blow a gasket over the prospect of lenders having to retain backing for 5% of the credit risk of securitized loans (those which aren't FHA or GSE loans) that don't meet Qualified Residential Mortgage standards of 20% down and non-exotic properties. We find it hard to sympathize. Why shouldn't lenders retain a piddling 5% reserve for the risky loans they've birthed into the world (and yes, loans without 20% down are "risky", especially in this climate)?

We know: the CRL and MBA are saying this would cause a huge correction in the market. They correctly state:

Based on 2009 home price and income data it says it would take 15 years for an average family to save the $43,000 down payment on a median priced home compared to only six years to save 5 percent to put down on the same house. This requirement, it says, would deny millions of responsible borrowers any access to the lowest rate loans with the safest loan features.

But that is simply the same as stating prices are still way too high today (or rather, priced way above fundamentals). Why should people have access to the "lowest rates" meant for the "safest loans" if, by virtue of not being able to make a full downpayment, their loans aren't safe? Does anyone actually think less of an equity cushion is a good idea in today's down-trending market?

The lobbies conclude "paper concludes that the proposed rules will also negatively impact the private lending market" -- well of course, if you define prices falling to a market-clearing level as a "negative" thing.

We would like to know what these lobbies propose to provide for stability in the market if it isn't a return to classical loan parameters. Remember, no one is saying that loans with a small downpayment would be forbidden: its just that the lenders would have to retain 5% of the risk.

If that is too harsh, make the downpayment limit 10%, or the risk retention 2.5%. But we can't do nothing.