"QRM" (Qualified Residential Mortgages) are not on the radar screens of certain segments of our industry. But they should be. Markets price and trade on expectations, and the government, and their agencies, seem to do a pretty good job of either giving us plenty of advance notice, or leaking the news to the press. QRM, which boils down to lenders keeping "skin in the game" by retaining 5% of the risk of the loans they sell," is no exception.

Here is a good primer to jumpstart anyone who wants to become acquainted with the topic - a recent Washington Post article discussing the topic: SkinInTheGame

The question is what the heck does that mean? How is the industry supposed to deal with a relatively vague notion of "high underwriting standards?" Using a standard of "any loans sold to Freddie & Fannie" won't work, since the LTV's are relatively high on many loans - and what happens if/when Fannie & Freddie go away entirely? How about mortgages with a 20% down payment will also be exempted from the risk-retention rule? Maybe...but what if the borrower has a 540 FICO? And what will happen to the government's mandate for home ownership if practically every loan out there is 80% or below? The answer would be lots of short term pain, especially for first time home buyers, but perhaps long-term health in the industry. What about FHA's high LTV programs - are they exempt due to government backing? And would FHA really want the additional volume of every loan above 80% LTV?

A ruling by the FDIC or OCC is expected in a little over a week, at which point every special interest group is expected to rise up not the least of which is the mortgage insurance industry. If 20% is really the hurdle, mortgage rates on such loans will be higher than QRMs because the latter will be less risky and more marketable.

Opinions tend to backfire. But I do have a few somewhat educated guesses. One of which is that, most likely, brokers will not be subject to the QRM rules that are heading our way despite a fair amount of sentiment that they should be. Loans are underwritten, docs drawn, funded, and closed in the name of the wholesaler - they have the risk. I may be drawing a target on my back here, but why would brokers be held liable for any QRM-related requirements? Mid-sized mortgage bankers, however, have more worries.

One reader wrote, "It occurs to me that the QRM concept of requiring lenders to retain $50k per million originated is better for the industry than most people probably realize.  When a lender or broker doesn't have skin in the game, which has been the case of the vast majority of brokers, it is clear that many have abused sound lending practices-get this deal approved whatever it takes.  The mortgage meltdown came about from this very issue-a huge sales force pushing bad loans literally without fear of reprisal.  "My conscience is the wholesaler.  It's their job to ensure sound lending is done."  "Oh and by the way, if that wholesaler won't do the loan I've got 3 others who will."  The wholesaler then has a choice, lower their standards and face the inevitable but distant reprisals, or don't do the loan and face immediate reprisals-no business.  This model might have worked if the wholesalers retained the lion's share of the income to pay for the losses, but the broker used the same model of beating up the wholesaler as he did for loan programs.  All of this created a "no-fault" divorce of sorts.  Who can blame the little broker eking out a living... right?  Hmm... a guy who left the carpet cleaning business because he found out two things: 1. I can make $30k a month in doing loans with no entry costs, training requirements, or fear of reprisals!!!  Compared to my $5k a month I've been making with the constant threat of call backs for work I've performed.   There's a no-brainer. 2. Hey!  There's a "t" in mortgage!  Ok easy solution, E&O policies and bond requirements!  Really? Wow, good luck getting them to pay a claim-it won't happen.  So that solution is clearly a mirage.  So in reflecting on your comments and the industries long overdue needed purging, it seems to be a pretty good solution."

"We could require stringent licensing and education (ok, that's going on.)  But in addition, create the ability for lenders to file complaints regarding violating originators for other lenders to see, thus not giving the loan officer the ability to abuse and move to the next. Or eliminate the mirage requirement of E&O coverage and bonds, and replace with audited financial net worth requirements of the $50k per million originated by ALL lenders. Audits cost less than E&O and bonds-and there would actually be funds available that would have a lot higher likelihood of paying mortgage loss claims. Commitment to sound lending practices would then go to the street level. Bad players would consistently be forced out within 3 years due to claims resulting from their bad practices-that's a lot more effective and a heck-of-a-lot less expensive than a huge force of government auditors and piles of paperwork. The free market will then do a lot better job protecting the consumer than questionable legislation (at best) like the GFE and other disclosure requirements that do not actually benefit the customer."

A mortgage lender associated with a builder wrote, "What will requiring 20% down do to the home building industry? Will it really help the consumer? The majority of our new starter homes, what few there are now, are sold to new families with higher LTV's than 80%. Could hitting this segment hard just be another 'unintended consequence' of regulators running wild? Check out 20%down?

"Readers need to be sure that they do not confuse risk retention and QRM. Risk retention is the requirement for securitizers, and perhaps originators, to retain a portion of every loan that backs a security that is sold into the capital markets. QRM is an exemption from risk retention. So to say that mortgage brokers will not be subject to QRM is simply incorrect. If mortgage brokers want to originate loans that are exempt from the risk retention requirement, the loans they originate will have to conform to the QRM regulations that will be issued by a joint group of six regulators -- the OCC, FDIC, Federal Reserve, HUD, FHFA and the SEC." So wrote Glen Corso with the Community Mortgage Banking Project.

Perhaps bowing to industry pressure, recent rumors suggest that banks won't have to keep a portion of mortgages they sell to Fannie or Freddie on their books. After all, keeping 5% of liquid capital of every mortgage made would kill the industry. Is a small mortgage broker or banker doing $10 million a month going to tie up $500,000 of cash every month? Lawmakers who drafted the legislation included a measure that would exempt certain mortgages from the risk-retention rule if their loans met certain high underwriting standards: Qualified Residential Mortgages."

MND has published a plethora of content on the topic: CHECK OUT SOME OF THE STORIES