The final QRM regulations will have a major impact on credit unions' mortgage lending activities. Grassroots advocacy generated by an organized credit union movement could play a powerful role in educating regulators, ensuring that sound policy and the original intent of Congress are reflected in the QRM definition, rather than rules that serve interests of a few large financial institutions.

The legislation identifies factors to be considered for the QRM standards, which include full documentation of income and assets, appropriate debt-to-income ratios, and the presence of credit enhancement, such as mortgage insurance or other government-provided coverage. The good news is these are all characteristics that credit union-originated mortgages have traditionally exhibited. It is critical, therefore, that credit unions educate regulators, such as the FDIC, to understand that the industry has historically applied these standards, originating high-quality loans that have performed well during the financial crisis. Regulators must also recognize the importance to members and communities of maintaining the viability of reasonably priced, nongovernment alternatives to FHA for first-time homebuyers.

Dodd-Frank contains numerous other provisions affecting residential lending, additional disclosure, tightening high-cost mortgage regulations and mandating appraisal and minimum ability to repay standards.

Although implementing new disclosures and operational requirements will impose administrative burdens on mortgage lenders, regulated financial institutions, such as credit unions, are treated a bit more favorably than nondepository mortgage brokers and bankers. For example, provisions mandating loan originators be “qualified,” and when required, licensed and registered, are applied differently to depositories. Although loan officers working for regulated financial institutions are required to register with a new national registry, employees of these entities are not required to be licensed (meaning they don't have to take a test). Whereas employees of nondepositories, such as mortgage brokers and bankers, must be licensed, which could give credit unions a competitive advantage in hiring loan officers exempted from the licensing rule.

Lastly, the administration recently indicated it will allow the jumbo conforming lending authority in high-cost areas (currently up to $729,750) for Fannie Mae, Freddie Mac (the GSEs) and the FHA, to expire Sept. 30, 2011. This will affect coastal markets of the Northeast, Mid-Atlantic, South Florida and the West Coast, as well as the Chicago metro area.

With this expiring authority, the GSEs' “permanent” high-cost area loan limit of $625,500 will again apply. The Department of Housing and Urban Development has yet to provide direction on how the FHA's loan limits will change, but expectations are they will be lower than those of the GSEs. Prior to increases in 2008, the maximum FHA-insured loan amount was $362,790.

Although there are currently only about 75 metropolitan statistical areas in the U.S. that are eligible for the highest loan limits of $729,750, out of a total of approximately 3,200, these 75 are densely populated areas that will have a sizable demand to be met when the GSEs and FHA are forced to reduce their loan limits.

In certain areas, this rollback of government-supported lending authority could present an opportunity for credit unions to utilize their portfolio capacity to offer conservative adjustable-rate mortgage products targeted to lower LTV, prime jumbo borrowers. Even moderate-cost areas could be appealing for portfolio-friendly, prime adjustable-rate asset growth.

Credit unions need to stay involved and aware of regulatory developments to maintain the viability of their mortgage lending operations. They're already well-positioned to leverage the coming changes in their favor, due to their abundant liquidity, higher underwriting standards and regulatory structure.

The active involvement of credit unions in the regulatory process will help ensure regulations, such as QRM, reflect the historic strength of credit union-originated mortgages, allowing the movement to leverage past successes to benefit members. 

Joel Luebkeman is director of marketing and product development at CMG Mortgage Insurance Co.
Contact 415-284-2508 or [email protected]