Thank you for contacting me to express your concern regarding recently announced criteria for “qualified residential mortgages” (QRMs). I appreciate hearing your thoughts on this issue and apologize for the delay in my response.
As you know, one of the leading causes of the recent financial crisis was a practice within the subprime mortgage industry of extending loans to borrowers who had little chance of repaying them. Because mortgage originators were not previously obligated to retain a financial interest in the riskier loans they issued, their incentives favored short-term profits over the long-term performance of the loans they packaged and sold to investors.
The Dodd-Frank Wall Street Reform and Consumer Protection Act (P.L. 111-203) attempted to correct this practice by requiring issuers of mortgage-backed securities to retain at least a five percent stake in the loans they package and sell to investors. The legislation, however, included an exemption for QRMs and required banking and housing regulators to develop underwriting standards to determine which mortgages could be considered stable enough to qualify.
In March, after surveying data on the factors that contribute to homeowner defaults, federal regulators issued a proposed rule defining QRMs as those made with a 20 percent down payment to borrowers with strong credit histories and a low debt to income ratio, among other standards. These criteria do not prohibit non-QRM loans from being insured or securitized by government-sponsored housing entities, such as Fannie Mae or Freddie Mac. Rather, these regulations will require issuers of non-QRM loans to retain a measure of credit exposure to the performance of the loan.
I understand you are concerned that these criteria – specifically the 20 percent down payment requirement – will stifle the housing market in California by raising borrowing costs for many potential homebuyers. The Federal Reserve is currently in the process of reviewing the many comments it has received in response to its proposed regulation in preparation for the release of a final rule. Please know that I will keep your concerns in mind as I monitor the Federal Reserve’s development of a final rule and its potential effect on Californians.
Once again, thank you for writing. If you have any additional questions or concerns, please do not hesitate to contact my Washington, D.C. office at (202) 224-3841. Best regards.
United States Senator
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