Change mortgage industry to protect consumers, investors
Amidst the political turmoil present in the federal government, the mortgage market has been among the most controversial in regards to how to protect the economy and consumers from future meltdowns.
Many experts claim risky loans, such as Negative Amortizing loans (Neg Ams) in which the interest is more than the payment, were the driving force behind the rapid rise of the housing bubble. The main goal of housing experts is to reduce issuance of such loans in order to maintain a healthy economy.
One proposal to accomplish would be Qualified Residential Mortgages (QRM), essentially “safe” mortgages that carry little risk to investors. However, when I asked the president of Ginnie Mae, Ted Tozer, what the technical definition of a QRM was, he stated that this “is the million dollar question” in politics right now.
One condition being debated is the idea of 5 percent risk retention. Banks would be required to keep “skin in the game” by investing 5 percent into each mortgage that is not a QRM and therefore risky.
In my opinion, this idea of “skin in the game” is an exceptional method to keep investors accountable while decreasing fraud and risky loans like Neg Ams. QRMs would also help reinforce the “affordable, basic, core product” loans that are necessary to maintain a healthy market, says John Courson, former president of the Mortgage Bankers Association.
I concur that QRMs should be based on the “ability to pay” principle, not on credit ratings, which will ultimately protect the consumer from future foreclosure. Credit ratings are also not accurate indications of a person’s fiscal responsibility. Overall, I believe that using QRMs and risk retention would protect both consumers and investors from future housing crises.