When I write (or think about things) I like to get my mental dialogue to the level of about a ten year old. This gives me the feeling that I can handle the subject matter and even make productive comments.
Mortgages aren’t complicated if you know how much the loan payment will be every month and you pay it regularly. It use to be that banks were very good at estimating whether you could make the payments. That is until they decided to change the rules a little.
In the smoking ruins of the mortgage debacle the Congress wanted to get back to that old time religion: When everybody had to put 20% down, nobody was underwater. When someone in the household had to have a job (and a history of having worked), no one was walking away from their mortgage. When the buyers could demonstrate they didn’t already have a mountain of other debt and actually had income to pay the loan, we didn’t have more government deals (think HAMP) trying to renegotiate the bad loans that shouldn’t have been granted in the first place.
Getting back to 5th grade math, lets suppose I want a mortgage loan but I can’t put 20% down or I don’t have enough income to pay the mortgage comfortably. The bank can still grant me the loan, but they know I’m a bad risk. Back a few years ago, they would grant the loan because they knew they were going to sell it to somebody else so their risk was negligible. Now the Dodd-Frank legislation says that when the banks sell my mortgage they must have some “skin in the game” by keeping 5% of the loan on their own books. Now 5% doesn’t seem like enough to me, but if that was as far as it went, the 111th Congress would have accomplished something.
But there’s a loophole.
The thought behind “skin in the game’ is that if banks must retain a portion of the loan, they won’t make bad loans because they too will suffer the consequences. They can still sell the loan, but not all of it. The loophole is a provision Congress put in that says if the loan is a “Qualified Residential Mortgage” it will be an exception and will be excluded from the 5% “skin in the game” requirement. So what’s a Qualified Residential Mortgage” or Q.R.M.?
The idea was proposed that if a loan was a traditional “old fashioned ” mortgage there would be no need to add the additional requirement of the 5% retention amount because the buyer would already have met time tested guidelines. Unfortunately the actual definition of Q.R.M. is not yet available and won’t be until April 2011.
This is where it gets hairy. From the New York Times: If bankers had their way, only loans that were negatively amortizing, or had balloon payments, would be excluded. You could buy a house with no money down, so long as you took out mortgage insurance. Even interest-only loans would be acceptable in some instances, and what few rules there were could be circumvented because bankers would be given discretion when applying the rules. Does that sound familiar?
The Wall Street Journal and the New York Times are at completely different ends of the compass when reporting what’s going on. The WSJ says that bankers are looking for more money down to make a mortgage and the NYT says bankers want to permit no money down, balloon payments and all the rest of that sordid mess that got us where we are today. I think the reason they seem to disagree has to do with the rules not yet being solidified. If the Q.R.M. rules are meager and virtually every mortgage qualifies as an exclusion the banks won’t have to guarantee any mortgages when they sell the loan. If the exclusion rules are tougher (like 20% down for the buyers) then banks must get higher down payments in order for loans to qualify for the exclusion. In either case it seems that most bankers consider the the 5% “skin in the game” rule something they desperately want to avoid.
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