Study Finds QRMs to Force 60 Percent of Creditworthy Borrowers Into High-Cost Loans

The Center for Responsible Lending (CRL) has announced the release of its latest study, "Balancing Risk and Access: Underwriting Standards for Qualified Residential Mortgages." Findings of the report show that government-mandated downpayment rules as established by the qualified residential mortgage (QRM) initiative, could push 60 percent of creditworthy borrowers into high-cost loans or out of the market altogether. The QRM proposal defines a high-quality mortgage as one with at least a 20 percent downpayment, or possibly 10 percent. CRL feels passage of this measure would hobble a healthy segment of the housing market. While higher downpayments do result in fewer defaults, the payoff is small relative to the number of creditworthy households who could be shut out of the market, the study shows. The results of "Balancing Risk and Access: Underwriting Standards for Qualified Residential Mortgages" are particularly striking for African-American and Latino homebuyers. A mandatory 20 percent downpayment requirement would exclude about 75 percent of African-American and 70 percent of Latino borrowers who could be successful homeowners from obtaining fairly priced mortgages. The study was produced by the UNC Center for Community Capital and the CRL. Researchers look at mortgages originated from 2000 to 2008 and what would have happened if a 20 percent downpayment and other underwriting criteria had been imposed beyond those already mandated by the Dodd-Frank financial reform law. The study finds Dodd-Frank’s ban on loans with the highest risk of default—for example, those with prepayment penalties or no income documentation—fixes the bad underwriting that caused the housing crisis. Adding a downpayment threshold set by the federal government would do little to reduce defaults relative to the large number of creditworthy home buyers it would push from the market. These findings are particularly significant because the stalled housing market has been a key obstacle to economic recovery.