The qualified mortgage rule hasn’t chilled lending
The qualified mortgage (QM) rule introduced in January 2014 was designed to prevent borrowers from acquiring unaffordable loans and to protect lenders from potential litigation. Many worry that the rule has contributed to the reduction in mortgage credit availability that has hit low-income and minority borrowers hardest. But our updated analysis finds that the rule has had little impact on the availability of mortgage credit, largely because the market had changed well before the rule took effect.
To investigate the impact of the rule, we tracked four potential indicators, none of which showed a connection to reduced lending:
- The number of interest-only and prepayment penalty loans didn’t decrease: The QM rule disqualifies loans that are interest-only or have a prepayment penalty. A reduction in these loans might show QM impact, but both types of mortgages were virtually extinct before QM took effect.
- The share of loans with debt-to-income ratios above 43 percent is unchanged: The QM rule disqualifies loans with a debt-to-income ratio above 43 percent except for loans with government backing.
- The adjustable-rate mortgage share still tracks interest rates: The share of adjustable-rate mortgages (ARMs) generally tracks interest rate changes, i.e. when rates go up, more people use ARMs and when rates go down, fewer people use ARMs. The QM rule requires that ARMs be underwritten to the maximum interest rate that could be charged during the loan’s first five years—a restriction that might deter ARMs and disrupt the interest-rate tracking. But after the QM rule took effect, the ARM share continues to track interest rate changes.
- The number of small loans has dropped but not much: The QM rule’s 3 percent limit on points and fees could discourage lenders from making smaller loans. But the slight drop since the rule took effect is largely attributable to home price appreciation.
What do these indicators really mean? First, that the market had largely adjusted in the ways that the legislation sought well before the QM rule took effect. In short, the barn door was already shut.
Does this mean that the rule is irrelevant? Absolutely not. Though the effect of the QM rule appears small to nonexistent now, it reminds us that lenders must ensure that borrowers are able to repay their mortgages. Long after our collective memory of the crisis has faded, this rule will be one of the positive legacies of the crisis that should help prevent the re-emergence of risky lending practices that could cause another downturn.
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Anita Britten, right, plays with her niece Amber Britten, 3, at her home in Lithonia, Georgia, Saturday May, 20, 2006. As more hybrid adjustable rate mortgages, or ARMs, adjust upward and housing prices begin to dip, many Americans can't refinance out of the this riskier type of loan. As a result, they are finding themselves trapped in too-high monthly payments, and those that can't afford them may face foreclosure. Photo by John Amis/AP