Several proposals  under consideration in Washington right now could dramatically impact the availability of mortgage credit. The U.S. Department of the Treasury released a white paper outlining a three plans for restructuring the housing finance system, all of which would involve winding down the current system dominated by the government-sponsored entities (GSEs), Fannie Mae and Freddie Mac, and replacing them with a system more reliant on private investment.

Another policy proposal, the qualified residential mortgage, is intended to reduce excessive risk-taking behavior in mortgage lending. During the housing bubble, some lenders made excessively risky loans since any risk associated with the loan’s performance was passed off to investors. In order to mitigate the dangers of lenders’ risk-taking orientation, the Dodd-Frank financial reform bill included a measure that would require lenders to retain five percent of the risk of each loan. Some loans will be exempted from the risk-retention requirements if they are insured or guaranteed by Fannie Mae, Freddie Mac, the Federal Housing Administration (FHA), or the Veterans Administration (VA) or fall into the category of “qualified residential mortgages” (QRMs), which are loans that have characteristics shown to be associated with low default rates. Regulators have proposed a QRM definition that requires, among other aspects, a 20 percent down payment and very low debt-to-income ratios. Currently, the vast majority of mortgage loans are backed by the FHA, Fannie Mae or Freddie Mac and would therefore be exempt from the risk retention requirements. However, if the Obama Administration’s proposed wind down of Fannie Mae and Freddie Mac occurs, private-sector lenders subject to risk retention requirements will play an even larger role in mortgage finance for low- and moderate-income people. Few low- and moderate-income borrowers are likely  to be able to meet a 20 percent down payment requirement.


Federal regulators are accepting comments on the proposed QRM rule until August 1, 2011. You can let regulators know your thoughts on QRM by emailing with the subject line “Re: OCC Docket Number OCC-2011-0002.”