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Two upcoming deadlines will have a great impact on mortgages and likely the housing market as well.
On August 1, the comment period ends on a risk-retention proposal which includes Qualified Residential Mortgage (QRM) standards that would require a 20% down payment on mortgage loans.
On October 1, mortgage limits on government backed loans are due to go back up to their pre-2008 levels. In the Washington DC area the new limit will be lower than the sales price of 74% of the single family homes sold in Northern Virginia.
What is a QRM, and why should you care?
Under the Dodd-Frank Act, federal regulators were required to write a rule clarifying which loans lenders and securitizers would have to retain 5% of the risk on after securitization. The hope is that this requirement will prevent another mortgage meltdown that created the housing crash and subsequent recession by encouraging the creation of well-documented, well-qualified loans. Those loans that meet QRM standards will be exempt from this risk-retention requirement. According to the current proposal, one of the QRM requirements is a 20% down payment.
Many industry associations including the National Association of Realtors (NAR) and the Mortgage Bankers Association (MBA) are against the proposed QRM because they feel it will negatively impact an already crushed housing market. The MBA argues that the proposed QRM standards are so restrictive that 80% of the loans sold to Fannie Mae and Freddie Mac in the last decade would not have met the requirements.
Currently, the QRM would not apply to FHA and VA loans or loans backed by Government-Sponsored Enterprises (GSEs), Fannie Mae and Freddie Mac. According to information from a recent GSE Symposium at George Mason University, 95% of all loans in 2009 and 2010 were backed by these entities and would be exempt from the QRM requirement for a 20% down payment. So why should we be concerned?
Recently, the White House recommended phasing out Fannie and Freddie, and papers presented at the GSE Symposium offered viable private sector options to replace the struggling GSE giants. If Fannie and Freddie, who currently back 70% of all loans, do not exist, this will put more pressure on FHA and VA–who backed 25% of all loans in 2009 and 2010–and the private sector to fill the void. If the private sector is strapped by a 20% down payment requirement, history shows that 80% of most borrowers won’t be able to meet this requirement, leaving FHA and VA in the impossible position of backing most loans.
What are the new mortgage limits, and why should you care?
In 2008, the government temporarily raised loan limits on 30 year fixed, government backed loans to $729,750 in the nation’s most expensive cities, including the Washington DC area. This was done because most buyers couldn’t meet and/or afford the requirements of jumbo loans (those loans that were too high for a government backed loan), yet the price on an average single family home in these cities exceeded the existing loan limit of $417,000.
On October 1, the higher loan limit is due to expire for a fourth time. The previous three times, the higher loan limit was reinstated or renewed. This time, it appears that Congress might allow the limits to expire. The new loan limit in the Washington DC Metro area will be $625,500–lower than the sales price of 74% of the single family homes sold (35% of all properties sold which includes townhouses and condos) in Northern Virginia last month. In May, the average sales price of a 4+ bedroom, single family home was $709,993. It is clear that a lower loan limit will affect the local housing market because buyers, who face already tightening credit conditions, will have an even harder time affording and/or qualifying for loans that will now be considered jumbo loans.
Stay tuned to my blog! I will keep you updated on both of these issues as information becomes available.
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