The federal government is proposing new mortgage finance rules only which home purchasers who can afford a minimum 20% down payment on a conventional loan would get the best interest rates and terms. Under the Dodd-Frank financial reform legislation this provision is called the qualifying residential mortgage, or QRM.
Dodd-Frank imposed a requirement that mortgage lenders keep 5 percent of the risk on their books even when they've sold off the loans. The rule will have a huge impact on what sort of loans lenders offer, and to whom. Smaller, thinly-capitalized mortgage originators can't afford to keep any of the risk so mortgages that don't qualify will be more expensive and harder for the average consumer to get. Big banks can afford to keep loans that don't qualify on their balance sheets. Smaller institutions can't.
To qualify under the QRM, not requiring lenders to retain 5% of the risk on their balance sheets, are proposals for very restrictive guidelines. Several in the proposal are a 20% down payment, 30 year fixed rate loan, debt-to-income ratios not to exceed 28%/36% and no 60 days late payments on credit cards in the last 24 months. For refinancing the minimum requirement would be 25% equity in their home.
If the borrower does not meet the pristine guidelines then not only will the lenders be required to hold 5% of the risk on their balance sheet but the interest rates will be higher. Currently, the estimate is 3% higher than those who meet the guidelines. That would currently equate to 7%-8% on a new loan. In 2009, 47 percent of homebuyers who purchased a home made a down payment of less than 10%. The new proposals would therefore disqualify about one-half of all prospective borrowers from obtaining QRMs. The higher interest rates will make the efforts to buy a home much more restrictive.
The proposals are out for public comment through June 10th. The Dodd-Frank ruling will take effect mid-2012.