A proposal put forward by federal regulators to define "safe" mortgages would raise refinancing costs for half the nation's homeowners with home loans, a coalition of industry and other advocacy groups has said.

The Coalition for Sensible Housing Policy says that 25 million homeowners could be affected by a rule that would effectively require borrowers to have at least 25 percent equity in their homes to qualify for the best terms when refinancing a mortgage. The number amounts to more than half of U.S. homeowners who currently have a mortgage.

The proposed rule would establish standards for what would be considered a Qualified Residential Mortgage (QRM) under the Dodd-Frank Wall Street Reform and Consumer Protection Act passed last year. Under Dodd-Frank, lenders must retain a financial interest in mortgages they originate unless the loan meets the standards for a QRM and is therefore considered highly unlikely to default.

The Coalition cites estimates from the National Association of Realtors that do not meet the proposed equity requirements for a QRM will end up paying interest rates between 0.80 and 1.85 percentage points higher than those that meet QRM guidelines. Moody's economist Mark Zandi has projected a smaller difference of 0.75 to 1.0 percentage points.

Most of the attention that the proposed QRM rule has drawn has focused on its proposed standard for home purchase loans, which would require a 20 percent down payment to qualify. By requiring a 25 percent equity stake for refinancing, the proposed rule sets an even stricter standard for homeowners seeking to replace their current home loan.

"The proposed rule moves many creditworthy, responsible homeowners into the higher cost non-QRM market," said an executive summary from the Coalition, which is arguing that the proposed equity standard is too strict. The Coalition says that other factors, such as income documentation and mortgage type, have a larger impact on reducing the risk of default than simply imposing hefty equity requirements.

Dodd-Frank requires lenders to maintain a financial interest, known as "risk retention" or "skin in the game," on most mortgages they originate. The law addresses what was seen as a major cause of the housing bubble and subsequent collapse of the subprime mortgage market, in which many lenders made risky mortgages to unqualified borrowers, then sold the loans off to unwary investors.

The law provides an exception for high-quality mortgages that are unlikely to default. The proposed QRM rule is an effort to define what those high-quality mortgages will be. The mortgage and real estate industries have been arguing that a lower equity standard should be adopted than the 20-25 percent standards currently proposed for home purchase and refinance mortgages, respectively.

The Coalition for Sensible Housing Policy consists of nearly 50 trade organizations and other entities with an interest in housing issues. Among others, it includes the Mortgage Bankers Association, National Association of Realtors and nonindustry groups such as the National Urban League and U.S. Conference of Mayors.

Published on July 29, 2011