The new Qualified Residential Mortgage rule, outlined in the Dodd-Frank bill, creates a scenario that will make many lenders want to abandon their mortgage businesses. The new rule is another example of a good intention that creates unexpected problems.
Dodd-Frank sought to create a means of forcing lenders to keep some skin in the game by
requiring them to retain some risk in the mortgages that they originate. See Section 15G, "credit risk retention," for the actual language.
There is a caveat to the bill which could threaten the ability of borrowers to find reasonably-priced 30-year fixed rate mortgages. The law allows for an exemption to risk retention when a mortgage is deemed to be very safe. For now, that exemption hangs on down payments. While some proposals have sought to only exempt loans with a down payment of at least 30 percent, it seems like the final split is going to fall somewhere between 10 and 20 percent.
When a loan is not exempt, Dodd-Frank says that the originating lender must hold a five percent stake in the loan. Lenders will hate having to retain risk on the non-exempt loans because they will be devoting capital to an investment that is not very profitable. In a system where a lender essentially flips a loan after 90 days to an MBS, most of the profit comes from fees. A lender can generate all kinds of fees right at the moment of closing. The interest is gravy.
Bank Rate publishes a set of common fees on mortgages. Currently, banks are charging borrowers all kinds of fees:
- discount points (optional)
- origination fee (also known as lender fee)
- application fee
- document preparation fee
- processing fee
- underwriting fee
- tax servicing fee
- wire transfer fee
This list doesn't include the fees that go to a third-party, such as appraisals or surveys or a credit report. At the same time, you have to wonder if there should be a $200 underwriting fee when there are separate fees for credit reports and appraisals.
Holding a 5 percent share in a loan means that banks have to use long-term debt to finance their mortgage loan originations. Right now, a 30-year corporate bond for a borrower with a AA rating costs as much as 5.79 percent. How can a bank justify lending money for 4.875 percent when it costs a bank 5.79 percent?
Many believe that the new QRM rules will force banks to increase interest rates on loans with lower down payments. Similarly, it seems likely that fewer banks will want to offer 30 year fixed rate mortgages. Thirty years is a long time for interest rates to go up, or for borrowers to keep a job.
There is a rumor that the QRM rules will exempt GSE loans as long as those institutions remain in conservancy.