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QRM Means Higher Rates During Market Volatility

A few weeks ago I wrote a piece on the mortgage rates that non-qualified residential mortgages would carry if the QRM rule is not changed.  In that article, I mentioned the enhanced volatility that non-QRM loans would face during economic swings.  This past week’s episode provides an opportunity to examine this issue more deeply.

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As the stock market fell last week, investors sought safe assets.  Ironically given the budget debate, U.S. Treasury bonds are and remain viewed as the safest asset and their prices surged as investors bought them up.  Other debt backed by the U.S. government also rose including that of the FHA (GNMA), Fannie Mae (FNMA) and Freddie Mac (FHLMC).  The prices of debt from these three entities show a significant increase in prices since April and a steady increase as the markets became more volatile last week.

As bond prices rise, the yield on them falls, meaning that the cost to the bond issuer falls.  In short, the government’s cost of capital, or its cost to do business (finance programs or back mortgages) fell.  The result, not surprisingly, is likely to be lower mortgage rates.

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However, it is worth noting that the price of FHA bonds grew more than that of Fannie Mae or Freddie Mac.  This price difference resulted in an expansion of the rate spread between which the GSEs and FHA could borrow money to make mortgages.  That difference is likely to translate into slightly lower mortgage rates on FHA loans compared to GSE mortgages.

This difference is important.  Despite the Federal ownership of the GSEs, the GSE debt is viewed as slightly more risky by the market than the FHA debt.  Given the administration’s and Congress’ plans to overhaul the GSEs, the uncertainty is justified.  The growth of this spread suggests that mortgage backed securities not backed by the Federal government would not have fared as well.  The result would have been an increase in the cost of capital relative to FHA mortgages and possibly higher rates than prior to the crisis if private MBS investors shift to corporate debt or some other asset.  These higher capital costs would be passed onto the consumer in the form of higher mortgage rates from private lenders.

The GSEs and the FHA are currently exempted from the QRM rule, but as the GSEs leave receivership, the bulk of the housing market will be exposed to the full impact of the QRM regulation.  Under the current form of the QRM rule, roughly 80% of the non-FHA market would bare these higher rates and the constricted supply of mortgage money during financial swings like this one.

Ken Fears, Director, Regional Economics and Housing Finance

Ken Fears is the Manager of Regional Economics and Housing Finance Policy. He focuses on regional and local market trends found in the Local Market Reports and the Market Watch Reports . He also writes on developments in the mortgage industry and foreclosures.

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Comments
  1. Jacque Olvera-Deki

    Maybe I am old school or just don’t get it, but what is wrong with asking for 20% down on mortgages? Forty some years ago this was the norm. Raising 20% down towards a loan equaling 80% seems a responsible amount to show that the consumer has some investment in the purchase. If we had continued that practice I am convinced that many of the short sales and foreclosures of the last couple of years would not have occured. I remember my father talking of a required 30% down and being amazed when that was lowered to 20%.