A second looming decision with big implications for mortgage credit involves something called the “qualified residential mortgage” rule. Although the name is similar, this is quite different from the qualified-mortgage definition, and is designed to curb bad lending by forcing lenders to hold a financial stake in their riskiest mortgages.
Under Dodd-Frank, a lender must hold 5 percent of any loan that isn’t a “qualified residential mortgage” (QRM) so that if it later goes sour, the lender loses something, too. This makes sense in principle, but like the qualified-mortgage rule, the devil is in the details. These are quite complicated, reflecting regulators’ fear that lenders will work hard to circumvent any rule. But complexity adds to costs, and as a result, non-QRM loans threaten to have meaningfully higher mortgage rates than QRM loans.
Since Dodd-Frank stipulates that loans made by the federal agencies are qualified residential mortgages by definition, how QRM is defined will help shape the federal role in the mortgage market. If the definition is too narrow, private lenders won’t be able to compete, given the higher interest rate they will need to charge to compensate for the extra risk. The government will thus continue to dominate mortgage lending in the near term. On the other hand, if Fannie Mae and Freddie Mac are privatized down the road, a narrow QRM definition could significantly shrink the government’s role in the mortgage market, potentially threatening the existence of the
30-year fixed rate mortgage loan.
QRM loans should thus be defined broadly enough to include about two-thirds of all qualified mortgages. This is about the share of the mortgage market that was backed by the government before the bubble, when the housing market was on a solid financial foundation.
Whatever regulators decide about the QM and QRM definitions, they need to do it quickly. Without clarity on these rules, mortgage loans will remain difficult to get, holding back housing and the economy. Clear rules also are needed so that lawmakers can finally figure out what to do about Fannie and Freddie, and the role government should play in the nation’s housing.
Mark Zandi is chief economist at Moody’s Analytics, a subsidiary of Moody’s Corp. He is the author of “Financial Shock,” a book about the financial crisis. His column appears occasionally in The Washington Post.