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The Next Bad Thing: the Qualified Residential Mortgage Rule

Adam Rust's picture

Posted January 4, 2011

A wrinkle in the Dodd-Frank bill could quash any recovery in the housing market.

The idea is simple - lenders need to keep some skin in the game. That is the purpose behind the bill's "qualified residential mortgage" rule.  It says that lenders have to hold five percent of the risk for two years.

The problem is that one big bank, Wells Fargo, may succeed in seeing to it that the definition of a risky loan is so

expansive that only a few banks will be able to remain competitive in the conventional loan market. Wells wants the qualified residential mortgage to exempt loans where borrowers have put down at least thirty percent. That is a very high bar.

I wrote about this problem in November. It is frightening that nothing has changed since then.

OK....here is a great report from CNBC that does a great job of outlining this situation. Normally, I would embed this video straight into Bank Talk, but CNBC is making that difficult. So, here is the link. You might have to put up with a 10 second advertisement before the report begins. I have to commend CNBC for doing such a good job explaining how this would work in the marketplace. Their main points, all of which I support, are:

  • Wells Fargo is trying to create a market advantage out of this new rule.
  • The Mortgage Bankers Association is siding with borrowers and small banks, both of whom would be hurt by the new requirements.
  • This will push more loans onto FHA.
  • Home prices will fall when fewer borrowers are able to qualify for a loan.
  • Wells' gain will be new pain for realtors and private mortgage insurance companies.

It really isn't fair to blame "government regulations" for a rule that is being lobbied for by a private bank.