WHAT REFORM MEANS FOR BORROWERS

QUESTION:

Is there a hidden part of Wall Street reform that will hurt mortgage borrowers?

ANSWER:

There has been a lot of debate regarding the 20-percent down standard for risky mortgages, but that requirement simply does not apply to the overwhelming majority of home loans. A more serious issue for borrowers, and one that has been rarely discussed, concerns credit standards.

To avoid liability and the requirement to set aside 5 percent of the mortgage amount in a reserve fund, lenders can issue “qualified residential mortgages” – QRMs. Most QRM requirements are fairly obvious – the lender must prove that the borrower has the ability to repay the loan, income and employment must be verified, etc. But one requirement is potentially very damaging.

Under the QRM rules, explains Laurie Goodman with Amherst Securities Group, a dealer and market maker in mortgage-backed securities, “mortgage loans can qualify as a QRM only if the borrower was not currently 30 or more days past due, in whole or in part, on any debt obligation, and the borrower had not been 60 or more days past due, in whole or in part, on any debt obligation within the preceding 24 months.”

The idea here has been to establish a credit-history requirement without actually naming a particular credit-score company. But the rule as it now stands is far too strict. Here’s why.

First, the delinquencies do not necessarily relate to mortgages. You could have had a missing gas-card payment from six months ago and the way the rule is now written that could stop you from getting a mortgage.

Second, the size of the delinquency is irrelevant. A $3 dispute with a hardware store is just as much of a “delinquency” as a missed mortgage payment.

The rule certainly is well-intended, but it needs to be modified. Delinquencies related to homeownership and of significant size ought to be the only ones that count.