Professional groups seek definition of ‘qualified mortgage’

The national Mortgage Bankers Association is one of 33 groups — ranging from the Appraisal Institute to the National Association of Realtors — that joined in a request asking the federal Bureau of Consumer Financial Protection to broadly define what a qualified mortgage is.

What is a qualified mortgage and why should consumers care whether it is defined broadly, narrowly or at all? This all goes back to the Wall Street Reform and Consumer Protection Act of 2010 (Dodd-frank Act) and addresses the secondary mortgage market. The secondary market, of course, is where mortgage-backed securities come into play.

That market was frequently blamed for the subprime lending crash that hit around 2007. The theory was that risky loans were bundled into mortgage-backed securities, which failed when borrowers couldn’t pay their mortgages and default rates soared. The end result was that the secondary market faltered, billions of dollars in mortgages were at risk and shockwaves were sent through the economy.

The Dodd-frank Act, in an attempt to prevent another credit meltdown, requires financial institutions that bundle loans into mortgagebacked securities to retain at least 5 percent of the “credit risk” of those assets. That risk-retention rule is an attempt to make sure the interests of the financial institutions bundling loans into mortgage-backed securities are in line with those of investors, mortgage lenders and homeowners. The theory is that everyone will stand to lose something if a mortgage doesn’t perform, so all parties involved will promote loaning money to borrowers likely to pay it back.

Qualified mortgages, however, are exempt from that 5-percent, risk-retention rule. A qualified mortgage is one that, historically, is considered a low risk because default rates are low. The question, then, is what is or is not a qualified mortgage? The trick, it seems, is to make sure only well-performing loans fall into the “qualified mortgage” category, but to not be so restrictive that some responsible borrowers are frozen out of the market.

“Most economists and housing market analysts in government and in the private sector agree that today’s underwriting standards are tight and are contributing to a slow housing recovery,” the statement from the Mortgage Bankers Association and other groups asking for a broad definition says. “Our organizations believe that an unnecessarily narrow definition of [qualified mortgage] that covers only a modest proportion of loan products and underwriting

The trick, it seems, is to make sure only well-performing loans fall into the ‘qualified mortgage’ category, but to not be so restrictive that some responsible borrowers are frozen out of the market.”

standards and serves only a small proportion of borrowers would undermine prospects for a housing recovery and threaten the redevelopment of a sound mortgage market.”

The Mortgage Bankers Association argues that a narrow qualified mortgage definition will slow down a housing market that is still struggling, but a broad definition, coupled with regulatory oversight and strong underwriting standards, will lead to a market recovery. The Mortgage Bankers Association states that nonqualified mortgages will be quite expensive to issue and will be in short supply, so it’s in the best interest of the public to make sure the definition is as broad as possible without letting risky loans slip through the cracks.

We will, no doubt, see more line drawing in the months to come in Washington and will learn whether the final definition is as broad as some groups want or as narrow as it appears to be now.