To avoid future housing crises, the federal government is creating a QRM (qualified residential mortgage) rule – a minimum standard a buyer or refinancer must hit before most banks will consider originating a mortgage, as required under the Dodd-Frank financial law.
However, raising the qualifications to get mortgage approval will also push some potential homebuyers out of the market. Since any QRM standard has the potential for harm as well as good, the University of North Carolina conducted a study.
According to UNC, a mandatory 10% downpayment for mortgages would push about 38 percent of creditworthy borrowers out of the home market. If the federal government chose to make a 20 percent downpayment mandatory, 61 percent of potential homebuyers would be unable to buy property.
The study also looked at possible default rates. Raising mandatory downpayments to 10 percent or 20 percent each decreased the potential risk of default, as did demanding higher credit scores from buyers – but at what cost, asked researchers.
The study authors said that “Overall, the evidence … suggests that stricter underwriting may not be the best approach to reducing foreclosures when weighed against ensuring continued access to sustainable mortgage credit for a wide range of creditworthy borrowers.” Authors said that the marginal benefit of tighter mortgage standards did not justify the risk to the housing market.
Researchers concluded that federal QRM protections could be achieved through “responsible underwriting without having to set a bright line for the QRM market.”
The 44-page study is available in PDF format on the University of North Carolina’s website.
Source: Florida Realtors®
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