QM-QE=DQ? How the New Reality in the Post-Dodd-Frank Mortgage Market Could Put a Big Freeze on Housing

:: By Steve Cinelli, Founder and CEO, PRIMARQ – Come this January, new elements of the Dodd-Frank Act will take effect with respect to mortgage lending activities. Recall the intent of the Act, a consequence of the financial crisis, was to improve transparency and accountability within the financial system, to protect taxpayers from footing the bill on egregious bailouts of financial services firms, and to protect consumers from abusive financial service practices.

In essence, the overarching goal was to bring a semblance of sanity and fairness back to a space overrun with excesses, shortsighted thinking, and fugacious remedies. Unfortunately, the changes on the horizon coupled with President Obama’s chatter about dissolving Fannie Mae and Freddie Mac may be great talking points, yet the outcomes could be harsh.

One element of Dodd-Frank is the application of the Qualified Mortgage (QM), which will place new structural and underwriting guidelines on lenders who seek to purely originate loans, which they will ultimately sell to Fannie and Freddie. As long as such guidelines are complied with, lenders can sell loans on a non-recourse basis, i.e., they will not be exposed to any future loan losses. If the loans do not pass the new smell test, then the lenders will retain some of the risk, as well as losing the “safe harbor” from future legal actions from borrowers and investors.

This will present a new reality in the market, in that banks are likely to play in one of four ways: (i) originating QM loans and successfully shifting risk to the GSEs; (ii) originating non-QM loans, and selling them anyway, but retaining some of the risk; (iii) originating non-QM loans and holding them as portfolio assets; or (iv) curtailing mortgage lending activities altogether. I doubt if many will opt for (ii) as risk retention will likely require reserves to be set aside, but without the benefit of the earnings on the loan. In (i), the qualification for loans will become more stringent, so we will likely see fewer approvals, which is not great for the housing market. And (iii), if the loans are held, the pricing of the risk will gradually increase, reflecting higher borrowing costs.

Additionally (iii) becomes a challenge as banks generally don’t have the willingness or the balance sheets to carry such loans. Think about the banking system in the U.S.. We have just 7,000 banks, well down from the 14,000 in 1985. Total assets (including loans) held by banks just exceed $14 trillion, of which the top ten banks control over 60 percent of those assets. Then overlay the housing finance segment, which amounts to about $10 trillion, with such housing loans largely (90 percent) held by Fannie and Freddie. The banks simply don’t have the balance sheets to carry the paper.

Unlike other countries, where banks retain the risk, but use programs like covered bonds to re-monetize their balance sheets, the U.S. system is critically dependent on the government’s role. Private mortgage securitization helped in years past, but the misreading of risk by rating agencies led to the hiatus of institutional investors in purchasing mortgage pools. Even further, the seminal role played by government also impacts the cost of mortgage loans. Chairman Bernanke’s monetary policy of quantitative easing (QE), by injecting $85 billion in fresh liquidity per month has kept interest rates artificially low, and in effect has subsidized the mortgage market. Has anyone really looked at the cost of housing finance rates in the U.S. vis-à-vis other markets, like the EU or Latin America, Canada, Asia and elsewhere? Generally, our mortgage rates are hundreds of basis points below other markets, and this is due to the orchestration of our rates by Washington. Because the government is the biggest player in our mortgage space, through the roles of Fannie and Freddie, it basically has set the subsidized price for housing finance. Certainly, Mr. Obama’s desire for the wind down of Fannie and Freddie, with the reentrance of private capital, may sound noble, but private markets are going to price risk to market levels, not at subsidized levels.

What can be anticipated in the move toward QM deployment coupled with the desire to fund the mortgage lending needs with risk-adjusted private capital rather than via the subsidized federal approach? Rates seemingly will be moving in one direction, up, to account for a true risk assessment and pricing thereof. And of course higher rates (read higher payments) translate into tougher qualifications for loan applicants.

So have we laid out a new equation: QM – QE = DQ?

Source: Huffpost – Steve Cinelli, Founder and CEO, PRIMARQ
Link: http://www.huffingtonpost.com/steve-cinelli/qm-qe-dq-how-the-new-real_b_3807306.html

Tags: ,

HEADLINE NEWS

This RSS feed URL is deprecated, please update. New URLs can be found in the footers at https://news.google.com/news [...]

TechCrunchFormer Gawker employees are crowdfunding an effort to buy Gawker.comTechCrunchWhile Univision acquired most of Gawker Media's sites last year (and renamed them as the Gizmodo Media Group), the deal didn't include Gawker itself. In fact, BuzzFeed reported last month [...]

ForbesCrowdfunding Do's And Dont's From iFundWomen's Karen CahnForbesDuring our conversation, she was transparent in sharing that her first software company, VProud, failed because she “did everything backwards” and spent too much time trying to perfect the product. “Pe [...]

VentureBeatAtaribox preorders and crowdfunding campaign open on December 14VentureBeatAtari will start taking preorders for its Ataribox game console starting December 14. The New York company will also start its crowdfunding campaign on Indiegogo. In an email blast, Atari said, “We a [...]

CurbedHistoric French chateau now has 13000 owners from crowdfundingCurbedThe Chateau de la Mothe-Chandeniers has had many owners since its construction in the 13th century. Now more so than ever. Over 13,000 strangers have recently banded together to save the fairytale home—which fea [...]

Crowdfunding For French CastlesNPRYou too can own a French chateau, in part, anyway. Romain Delaume, CEO of Dartagnans, tells NPR's Scott Simon about a crowdfunding effort underway to preserve La Mothe-Chandeniers. SCOTT SIMON, HOST: What if I told you that for about $60, you cou [...]

Financial TimesCrowdfunding a mission to save capitalism from itselfFinancial TimesJeff Lynn is on a mission to save capitalism from itself at a time when millions feel locked out, and unable to foresee themselves better off than their parents. His answer: to democratise capital. That [...]

Comics BeatCrowdfunding Watch: Women to the RescueComics BeatAlas, another Monday begins. We're all here at our computers, staring at the screen until our eyeballs turn into raisins. I'll try to keep this week's crowdfunding round-up short and sweet. This week we'r [...]

WRAL Tech WireNew crowdfunding platform launches in North Carolina: LocalstakeNCWRAL Tech WireEasley points out that LocalstakeNC “is the first investment crowdfunding platform exclusively serving North Carolina. Startups and small businesses ranging from technology startups to retail [...]

Crowdfunding Campaign Underway To Establish Freediving Lanzarote DestinationDeeperBlue.comFreediving Champion Marianna Krupnitskaya has set up a crowdfunding page to help her set up an amazing freediving destination in the Canary Islands. The Freediving Lanzarote project will ultimate [...]

CFB Finance

Marketwired

  • Crowdfunding
  • Crowdfund
  • Peer to Peer Lending
  • FinTech
  • Reg A+
  • Reg CF
  • Crowdfunding USA

Press Release

Live Crowdfunding .tv

What's Next Step in Regulation A+ JOBS ACTS Title IIII :L Interview : Steve Cinelli with Brian Korn Securities and Crowdfunding/Peer-to-Peer Lending Lawyer, Watch more video library | Conference | Interview | Campaign Showcase | Research | Education |