Let's begin with a speedy clarification of how we got here. For the past 50 years, housing policy has relied on looser underwriting standards in an effort to increase homeownership and help the economy. Much of that lending has been targeted to low- and moderate-income homebuyers in an attempt to build wealth for these households.
That agenda has pushed a reliance on high leverage, long paying back schedules (30-year loan terms), low down payments and high debt to income (DTI) ratios. In addition, these loans are often made to borrowers with impaired credit. Downtown Real Estate that focuses on helping our clients buy and sell homes in the downtown Chicago area.
That approach may have increased homeownership rates in the short term, but many homeowners could not handle their payments, and we are now seeing homeownership rates return to pre 1970 levels in the low-60-percent range. The push towards homeownership has neither increased the rates over the long haul, nor has it dependably created wealth.
After this drive failed and the great recession took hold, lawmakers Barney Frank and Chris Dodd championed new legislation, called the Dodd-Frank Act (DFA), to prevent another financial tragedy.
The DFA greatly expands oversight and guideline of the financial institutions not seen since the Great Depression, and includes three criteria for housing finance reform: first, a high quality mortgage- called the Qualified Residential Mortgage (QRM)-that would have a minimal incidence of default; second, a set of minimum mortgage standards called the Qualified Mortgage (QM); and third, a requirement that the securitize of any mortgage not a QRM retain at least 5 percent of the risk of any mortgage pool it sponsors.
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