Jul 26, 2011
QM vs. QRM — crucial differences
26 Jul 2011
Posted by Andrew Kantor
There are two types of mortgages covered in the Dodd-Frank Act, and both are going to impact Realtors in a big way. They meet very different requirements, and the American Securitization Forum wants to make sure that Federal regulators enforce that.
You’ve got QMs (qualified mortgages) and QRMs (qualified residential mortgages).
The standard for QMs is fairly broad: A lender must ensure that any borrower has the ability to repay the loan. (There are nine standards that determine this.)
Just about every loan is going to be a QM — there are legal penalties for banks that write loans that don’t meet the standards. And by meeting the standards, lenders are shielded from some liability. (Borrowers won’t be able to say “The bank should have known I couldn’t pay.”)
Only in limited circumstances are banks allowed to make non-QRM loans.
QRMs, on the other hand, are a subset those loans. They have to meet stricter standards — standards that still haven’t been determined, and could include the infamous 20%-down requirement.
Banks and other lenders are free to make non-QRM loans, but there are discouragements. For one, the lender could only sell 95% of the loan to the secondary mortgage market; it would have to keep 5% on its books as “skin in the game.”
More importantly, neither Fannie Mae nor Freddie Mac will buy any part of a non-QRM loan. Considering they own 90+ percent of the secondary mortgage market, that means it will be pretty hard for any lender to sell a loan that doesn’t meet QRM standards.
The bottom-line message to lenders from Dodd-Frank: “Your loans must meet some basic requirements, including the borrowers’ ability to repay (QMs). And if you want to sell those loans to Fannie or Freddie, they’ll have to meet even stricter requirements (QRMs).”
The law says every mortgage will meet QM standards. Common sense says that almost every mortgage will meet QRM standards as well (whatever they are). Still, they are two separate things, and that’s what the ASF wants to be clear.
A loan could meet QM requirements but not be a QRM, and the ASF wants to be sure that lenders who issue those still receive protection from liability. In other words, it doesn’t want the two definitions merged, even if the vast majority of loans will likely be QRMs.
It told Housing Wire that, when the Consumer Financial Protection Bureau issues its final rule about QMs, that rule “balances the important need to protect consumers with the legitimate goal of providing institutional investors in the capital markets.”