QRM – not to be confused with QR

by Victor Lund on March 31, 2011

The FDIC is rolling out QRM. It is a new banking rule that requires that a bank must put aside a 5% retention on any loan that does not include a 20% downpayment. I do not have a PHD in Economics, but I can imagine a few implications that may crop up as a result of QRM.

  1. If banks must retain 5% as a result of QRM, they will need to make fewer loans either as a result of consumers not being able to put down 20% or as a result of the bank needing to retain the 5%, reducing their available cash to make loans.
  2. Fewer loans will slow the churn rate in the housing market, increasing inventory levels and driving down property values
  3. Lower property values will result in more lost equity
  4. More lost equity will result in more foreclosures
  5. More foreclosures will result in more lost equity
  6. and so on and so forth.

The real issue is that people with solid income and 780 credit scores are walking away from homes becuse they are not hopeful that they will regain their lost equity anytime soon. Here in California where $1 Million dollar homes are considered middle-upper class, property values may have dropped 20% for those home purchasers who bought 3 or 4 years ago. When you home looses $200,000 in value, even the best financed family would be prudent to walk away. Afterall, they can simply pay cash for their next home and benefit from not taking the $200,000 loss. In a few years when their credit is repaired, they can finance their home and replenish their savings.

Duh…..

By the way, QRM has nothing to do with QR codes – to learn about those visit RE Technology

 

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