Balancing Risk and Access: Underwriting Standards for Qualified Residential Mortgages

47 Pages Posted: 4 Feb 2012

See all articles by Roberto Quercia

Roberto Quercia

University of North Carolina (UNC) at Chapel Hill - Department of City and Regional Planning

Lei Ding

University of North Carolina (UNC) at Chapel Hill

Carolina Reid

University of California, Berkeley

Date Written: January 18, 2012

Abstract

As policymakers develop underwriting guidelines for qualified residential mortgages (QRM) — which are exempt from risk retention requirements for privately securitized mortgages under the Dodd-Frank Wall Street Reform and Consumer Protection Act — both consumer and industry groups have raised concerns about the disproportionate impact that restrictive QRM guidelines may have on low-income, low-wealth, minority, and other households traditionally underserved by the mainstream mortgage market. In this study, we examine the way different QRM guidelines may affect access to mortgage credit and loan performance, with a special focus on historically underserved households. More narrowly, we estimate the additional impacts on defaults and access resulting from setting QRM underwriting guidelines over and above the proposed product restrictions for qualified mortgages (QM), which exclude loans with features associated with higher default rates.

We find that the added benefits of reduced foreclosures resulting from restrictions beyond the QM product requirements do not necessarily outweigh the costs of reducing borrowers’ access to QRM mortgages. In particular, LTV requirements of 80 or 90 percent produce a smaller benefit when the resulting reductions in defaults are weighed against the number of borrowers excluded from the market. The results for debt-to-income (DTI) and borrower credit scores (FICO) similarly show that the most restrictive thresholds are less effective because they exclude a larger share of borrowers in relation to percent of defaults they prevent. In addition, we find that more stringent LTV, DTI, and FICO requirements could disproportionately deny low-income borrowers and borrowers of color access to QRM mortgages.

Keywords: Access to credit, mortgage market, federal regulations

JEL Classification: D18, D63, G21

Suggested Citation

Quercia, Roberto G. and Ding, Lei and Reid, Carolina Katz, Balancing Risk and Access: Underwriting Standards for Qualified Residential Mortgages (January 18, 2012). Available at SSRN: https://ssrn.com/abstract=1991262 or http://dx.doi.org/10.2139/ssrn.1991262

Roberto G. Quercia

University of North Carolina (UNC) at Chapel Hill - Department of City and Regional Planning ( email )

New East Building
Chapel Hill, NC 27599-3140
United States
919-962-4766 (Phone)
Not available (Fax)

Lei Ding

University of North Carolina (UNC) at Chapel Hill ( email )

102 Ridge Road
Chapel Hill, NC NC 27514
United States

Carolina Katz Reid (Contact Author)

University of California, Berkeley ( email )

312 Wurster Hall #1850
Berkeley, CA 94720-1850
United States
510-604-0790 (Phone)

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