This year, it won't be good enough to find the lowest mortgage rate among a sea of quotes. It's also going to become important for prospective borrowers to understand how well mortgage lenders can tolerate risk. In fact, lenders have started to position their response to new industry regulation in ways that could block competitors from even offering mortgage quotes to most customers.
In July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act, passed both houses of Congress. By the time President Obama signed the legislation into law, banking industry officials wondered whether the measures designed to protect consumers would create an unintentional negative impact on the housing market.
Like most banking laws, Dodd-Frank lacked specific rules for mortgage lenders. Instead, the act put the Federal Reserve in charge of designing new ways to calculate whether banks and private mortgage companies had taken on too much risk.
Resale of loans in focus
Debate within the mortgage industry centers on a new rule that requires mortgage lenders to retain a 5 percent stake in any home loan they intend to resell on the secondary market. Banking industry critics cite frequent resale of risky home loans as a major reason for the mortgage market collapse of the past few years.
Lawmakers suggested that forcing loan originators to bear some of the risk would force them to make better decisions, to keep more accurate records, and to pay more attention to the properties in their portfolio.
However, not all mortgage loans will trigger the so-called "risk retention" rule. The Dodd-Frank requires the Federal Reserve to produce a definition for the phrase "qualified residential mortgage."
Mortgage lenders handling QRM deals would keep some "skin in the game" throughout the life of a home loan. Meanwhile, deals that earn exemption from the QRM definition could attract mortgage brokers and lenders willing to offer even better rates in exchange for the ability to resume trading these properties on the secondary market.
Banks plot strategy
Banks have started to square off on the issue, with large lenders hoping to use the QRM definition and the risk retention rule to squeeze smaller mortgage brokers and private equity companies out of the business.
For example, Wells Fargo representatives drafted a formal letter to regulators suggesting that they define QRM as any deal involving less than 30 percent home equity. Setting the bar that high could leave the residential mortgage market open only to companies with extremely high amounts of cash to invest. Industry watchers continue to speculate on the impact of QRM, regardless of the final ruling.