NAHB: Federal proposal could raise refinance costs for nearly 25 million homeowners

In top six most affected states, at least six in ten homeowners would face higher costs to refinance.

Nearly 25 million homeowners across the country would face more expensive mortgages if a proposal by federal regulators goes unchanged. A proposal released by six federal agencies to implement credit risk retention provisions included in the Dodd–Frank Wall Street Reform and Consumer Protection Act would require homeowners to have at least 25 percent equity in their homes in order to qualify for a lower-rate "Qualified Residential Mortgage" (QRM) for refinancing.

An analysis of the CoreLogic data shows 24.8 million U.S. homeowners – more than half of all U.S. homeowners with a mortgage - have less than 25 percent equity in their homes.Homeowners looking to refinance but fail to qualify for a QRM will be subject to additional costs associated with lenders' risk retention requirements included in the Dodd-Frank bill. According to the National Association of REALTORS®, consumers in a non-QRM loan could pay between 0.80 and 1.85 percentage points more in interest rate, simply because they could not meet the down payment or equity requirements.

"In short, the proposed rule moves creditworthy, responsible homeowners into the higher cost non-QRM market," stated an executive summary of the analysis by the Coalition for Sensible Housing Policy, a group of more than 40 consumer organizations, civil rights groups, lenders, real estate professionals and insurers, in a recent White Paper on the proposed QRM rule.

The proposed QRM definition is part of the risk retention regulations required by the Dodd-Frank Act, which Congress enacted last year. The risk retention provisions require the issuers of mortgage-backed securities to retain a portion of the risk of potential loss on those assets. Recognizing that risk retention would impose increased costs even on creditworthy borrowers, Congress sought to incentivize more responsible borrowing and lending by exempting some mortgages – QRMs – from risk retention requirements if they met thorough underwriting standards.

The proposed QRM rule ignores compelling data that demonstrate sound underwriting and product features, like documentation of income and type of mortgage, have a larger impact on reducing default rates than high down payment and equity requirements.

The Coalition for Sensible Housing Policy believes that QRM should be redesigned to encourage sound lending behaviors that reduce future defaults without harming responsible borrowers and lenders. For more information, visit www.sensiblehousingpolicy.org.