Orange County, CA – A coalition of five mortgage industry trade groups has published an open letter to the Federal Housing Administration, questioning the functioning of the proposed Qualified Mortgage rules (QM). (For a review of the QM rules click here.) The letter’s gist is simple.
The purpose of the QM rules is to prevent banks from lending mortgages to people who are unlikely to be able to afford those mortgages, and the rules apply to everyone from private lenders to the FHA and VA. But, reminds the letter, the FHA already has it’s own strict underwriting standards that work quite well — adding the additional layer of QM rules to the existing standards is both costly and unnecessary.
The letter claims that any loan that makes it through FHA underwriting should automatically be considered QM compliant and a ‘safe harbor’ loan. Safe Harbor loans offer the lenders special protection from litigation. This makes them preferable to ‘reputable presumption’ loans, which have no such protections.
They say the addition of the redundant QM rule will increase costs and reduce credit availability for low-income borrowers — the ones most in need of an FHA-insured mortgage.
The letter was co-written by members of the American Bankers’ Association, the Consumer Bankers’ Association, the Consumer Mortgage Coalition, the Independent Community Bankers of America, and the Mortgage Bankers’ Association.
In a separate letter, the Consumer Mortgage Coalition stated their argument more clearly: “If a loan could qualify for FHA insurance and yet not meet the ability-to-repay requirement, it would suggest a problem with FHA requirements. In that case, revising the FHA requirements nationwide would be the appropriate remedy,” CMC says.
QM Rule Counterpoint
Of course, there is always the other side of the story: the unspoken reason why these organizations want to prevent a double-up of rules on FHA mortgages is that they want their mortgages to go through quickly and easily. The idea that the cost will come down hard on low-income people applying for FHA mortgages is questionable; the fact that there is a cost that will come down hard on the issuers of these mortgages is not.
The fact that “low-income borrowers may not be able to get credit” is the entire purpose of the QM rules. It’s just written from the other perspective: “banks won’t be able to give mortgages to people who can’t afford to pay them back” is the same concept. In that regard, the letter is literally complaining that the law is going to do what the law was always intended to do.
In the end, the fact that a group of trade organizations got together and tried to convince a regulatory organization to ease up isn’t a surprise. It would be a surprise if the CFPB (the organization responsible for the QM rules) actually paid a significant amount of attention to the letter. While the point about FHA underwriting standards is a good one, it’s probably not enough to get a special exception written into the law — especially since the law goes into effect only 2 months from now.