Refinancing a home mortgage will become quite expensive in the near future due to the credit risk retention rule. Moreover, those homeowners who don't have substantial equity in their property will have to take a decision even faster. However, it has been said that the rule governing "qualified residential mortgages" is still in fluctuation and may not come into effect until at least a year from now.
What is the Credit risk retention rule?
This is a part of the federal Dodd-Frank Act. Under this rule, it requires the lenders that they securitize mortgages to retain 5% of the credit risk. However, if the mortgage is a "qualified residential mortgage" or otherwise exempt, then this rule won't apply.
What is qualified residential mortgage (QRM)?
As per the definition of QRM, the homeowners are required to have equity of 25% in their property for a rate-and-term refinance. They should have at least 30% equity for a cash-out refinance. Apart from that, they should meet the other credit-related guidelines as well. It has been estimated that fewer than half of the homeowners in the country have that much equity in their property. However, these loans are expected to be less costly for borrowers because the loans won't be subject to the risk retention requirement.
Are there any alternatives to QRM?
Those homeowners who have less equity in their property will have to act fast and refinance their homes before the credit risk retention rule becomes effective. But, the rush may turn out to be unnecessary as the QRM rule hasn't yet been finalized. However, other options to refinance their homes will be available to equity-poor homeowners.
- FHA loans: The new rule will exclude the FHA loans. So, those homeowners who have less equity in their property may go for the option of FHA loans. However, these loans will require the borrowers to pay for mortgage insurance.
- Confirming loans: The newly proposed rule allows conforming loans to avoid the risk retention requirement. However, this will be true as long as Fannie Mae and Freddie Mac continue to operate under federal government conservatorship. If these entities are privatized, then conforming loans may not remain an option for equity-poor homeowners.
- Loan with mortgage insurance: The new rule doesn't say whether these loans will be excluded from the risk retention requirement. Mortgage insurance is likely to be addressed in the final rule.
- Cash-in refinance: Another option for the equity-poor homeowners is to go for the option of cash-in-refinance. In this process, the homeowners will have to bring cash during the closing. This will help the homeowner's to lower the outstanding loan balance which will in turn increase the equity ratio to meet the lender's requirement.