As the Consumer Financial Protection Bureau (CFPB) continues to work its way through the rule-making process, consumers are reading more about what banks are doing to deal with the changes. Banks, being risk-averse by nature, are working hard to mitigate the impacts of any rules they feel may harm their businesses.
One of the new rules that lenders find least palatable involves risk sharing. Federal regulators have determined that one of the reasons lenders made questionable loans that contributed to the financial crisis was because they knew the loans would be sold off to secondary market investors, making the bad loans someone else’s problem. To discourage this thinking, the CFPB is considering making lenders maintain some ownership in all loans, keeping them responsible. In addition, the nation’s largest investors have begun to aggressively assert their contractual right to make lenders buy back loans that go bad. Taken together, these changes make it much more important for lenders to make loans only to borrowers they are sure can and will repay them.
Of course, this could prompt lenders to make far fewer loans, making it harder for consumers to get financing for new homes and putting pressure on the improving recovery. The federal government doesn’t want this either, so regulators are working with the industry to find a compromise that will allow lenders to continue to make new loans but take an active role in ensuring that borrowers can afford the loans they buy.
The compromise will likely come in the form of the qualified residential mortgage (QRM). Basically, the QRM is a description of a loan product that exists in a safe harbor for lenders. If they make a loan that meets the requirements for a QRM, they will not be asked to hold part of the risk and will be protected from future buyback requests. The only problem now is determining exactly what constitutes a qualified residential mortgage.
What this means for consumers is that banks will be working hard to see that most, if not all, of the borrowers they lend to can qualify for a QRM. These loans are, by definition, designed to be less risky, so the QRM will likely impact how much consumers can borrow and how close to the appraised value of their properties they can get. It will also likely require consumers to take better care of their own creditworthiness.
On the brighter side, banks are being discouraged from writing negative amortization loans and those with balloon or interest-only payments or prepayment penalties — all products that caused problems for the industry and consumers just prior to and during the economic downturn.
Qualified mortgages are likely to be the loan products lenders offer consumers in the future. This doesn’t mean they’ll be the only mortgages available in a free market, but they will almost certainly be the most affordable.
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Rick Grant has been covering financial services for the trade press for more than 15 years. He specializes in home finance and technology.
Note: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinion or position of Zillow.