Defining a qualified mortgage

By Mark Zandi, Published: August 24The Washington Post

Too-easy credit and millions of bad loans made during the U.S. housing bubble paved the way for the financial calamity and Great Recession that followed. Today, by contrast, credit is too tight. Mortgage loans are particularly hard to get, creating a problem for the housing market and the broader economy.

Banks are key to the availability and cost of mortgage loans, but so too are bank regulators. And as directed by the Dodd-Frank financial reform, regulators will soon make some important decisions affecting who can obtain mortgages and what interest rates will prevail.

One key decision involves the definition of what the Dodd-Frank law calls a “qualified mortgage.” Lenders probably will only make qualified mortgages, because if the loans ever go into default, they could be sued by disgruntled borrowers. The legal and reputational costs would be prohibitive. How qualified mortgages are defined, therefore, will essentially set the boundaries of the U.S. mortgage market.

Basically, a qualified mortgage will be one that a household can reasonably be expected to repay. That makes sense: No one wants to see another housing boom and bust, and barring lenders from making loans that borrowers can’t afford seems like a good way to prevent that.

But deciding which loans will qualify will be tricky. Lenders look at potential borrowers from many angles before extending credit: How much of its income will a household need to put into debt repayment? How large is the down payment? Does the borrower have a job with a stable income? What is the borrower’s credit score? Mortgage loans can also vary widely, with features that make sense for one borrower but not for another.

If the government defines “qualified” too tightly, mortgages will become even harder to get than they are now. Minority, lower-income and first-time home buyers will have the most trouble, and many will be blocked from homeownership. Ironically, these are the very groups that financial reform was supposed to protect.

A narrow qualified-mortgage standard will ensure that the federal agencies Fannie Mae, Freddie Mac and the Federal Housing Administration continue to dominate U.S. mortgage lending. This is because Dodd-Frank presumes that any loans these agencies make are qualified by definition. Yet no one wants the government to remain the nation’s main mortgage lender. Thus, while the definition of a qualified mortgage should be set judiciously, it should be broad. At the very least, the limits for private lenders should match those used by the government agencies.

Wherever the lines are set, however, the definition of a qualified mortgage should be crystal clear. There needs to be a bright, well-understood line between what is acceptable and what is not. Fuzzy definitions open to interpretation will leave lenders uncertain and thus overly cautious, restricting credit and crippling the market.

To further allay these worries, lenders should be given legal safe-harbor protection, making it difficult for borrowers who receive qualified mortgages to sue. The risk that this will allow too many bad mortgages to be made is meaningfully smaller than the risk that, without such protection, many more good mortgages will not be made.


Michelle Castle provides mortgage loans to all of North Texas and Southern Oklahoma. Call Michelle Castle at (903) 892-1998 if you are looking for a home loan in North Texas and Southern Oklahoma. Click here to visit Michelle’s website and apply for a loan.

This entry was posted in Home Loans, Homeowner, Loan/Mortgage Process, Mortgage and tagged , , by Michelle Castle. Bookmark the permalink.

About Michelle Castle

Since 1996 I have had the pleasure of assisting thousands of families find the perfect loan. I understand life is hectic and moving a family can be a stressful experience. I believe it is important to keep my clients informed every step of the way. I am easily accessible so my customers can focus on moving their family into their new home. If you have friends or family that aren't sure if they qualify to buy a new home, send them my way. I would be happy to get them on the path of homeownership. I also enjoy helping families refinance their homes to either get their equity out of their home or do just save money. Allow me to give you the peace of mind families have trusted for years.

Leave a Reply