Now, after the financial crisis, the people were really angry that the mortgage, the CMO and CDO people had repackaged mortgages and sold them to the general public. And that the banks who sold the mortgages didn't really care whether they were good or not. Because they weren't going to own them. If you're in the mortgage origination business, you're a banker that makes mortgage loans, and you know you're going to resell it to some ignorant investor, then you say, what's the point? I'll approve everybody, I'll make maximum amount of money. So this was the period when, among other things, the liar's loan occurred up here. That's a nickname, that's not what it was officially called. But a liar's loan was a mortgage issued to a person who did not show evidence of having a job or having a good record. They just took the guy on faith. Maybe they faked it and said that they did have evidence. This is a crime to do that, right? To take out a mortgage that you think is highly likely to default to get a credit rating which is not careful at all. And to sell the securitized mortgage to ignorant people all over the world thinking that they're investing in a sound enterprise. So in Europe, the European Parliament passed a rule that a mortgage originator must hold 5% of the mortgages that it initiates. So if you're a bank and you issue mortgages, you can't sell the last 5%. That gives you an incentive to stay above level and not to give liar's loans, for example. Here's an example of the US copy in Europe. In 2010, the Dodd-Frank Act copied this idea, but it said that we won't require that if the mortgages are qualified residential mortgages. So the term qualified residential mortgage was defined by the Dodd-Frank, actually, it didn't fully define it. The Dodd-Frank act said our regulate, the appropriate regulators will have to come up with the definition of a qualified residential mortgage, which is a mortgage that is where all the right things have been done by the originator, the lender, to assure that it won't default. This is funny, the Dodd-Frank Act is very difficult to read. I have to admit, I havent read all of it, but it's almost 1,000 pages long. It's not written to be readable. Have you ever tried to read legislation? They'll say some things like, in the something act, the Credit Act of 1940 something, lying such and such is hereby stricken and the words are replaced with. So in order to read this stupid thing, you've got to go back and forth between all the other legislation to figure out what the other one said, so it's complicated and it leaves all these open ends. So the Dodd-Frank Act said that you, as a mortgage originator, have to hold 5% of the mortgages you issue, or more, unless it's a qualified residential mortgage as will be defined in due course. So they left it to the regulators to say you have to define what is a qualified residential mortgage. And that means a mortgage that has been done properly, so that we can be reasonably assured that the homeowner won't default. So they brought this up to the, right now, it turns out there's multiple regulators of mortgages, and they couldn't get their act together. They started issuing proposed rules, that's what they do. Before issuing a definition of qualified residential mortgage, they put up on their website, we're thinking of this definition. So what do you think happens? Every banker in the country gets on to it and writes a complaining letter. So it's such a mess, you can get on to their website and see. I think that for the QRM definition, they got over 10,000 comments. They called them comments, often angry complaints. You can't do this. I can't stay in business if you put that definition on. So, it took them four years to come up with the definition. Originally they had a 20% down-payment requirement. They've dropped it. So, I tried to read the rule, I tried to read it. I discovered it was taking me a long time, so I went to the end and it had 689 pages to define a qualified residential mortgage, that's a lot of pages. Well you get lawyers, and get them going and you get all these bankers arguing about it and all their lawyers. It gets very complicated but at least they did it. And so here, this is not reading the 689 pages. This is a summary from a mortgage website. Now incidentally, you don't have to adhere to these rules. But you can't sell all of the mortgages if you don't. And so bankers pretty much are all going to follow these rules because they don't want to be stuck with something that can't be sold. Bankers have to sell the mortgages to get money to make new mortgages, they're in the mortgage origination business. And mortgages are inherently not held by banks, somewhat by banks, but often not. So they just generally want to qualify. So that means that you have to have equal payments, or substantially. You can't have no payments at the beginning, and then payments later, because that would be attracting borrowers who don't have the money, right? It'll be confusing borrowers, they might think that the loan payment is forever. No negative amortization. That means, remember we talked about amortization, and that price level adjusted mortgages that were tried in the 80s had negative amortization at first, in nominal terms. Because the interest rate was so high, that nobody could pay that. In a high inflation environment, you have a fixed nominal payment for 30 years, but inflation is going up at 10% a year, prices are going up at 10% a year. That means the real payment is going down. So the real payment is declining through time, but the nominal payment has to be constant now. So you can't have negative amortization and qualify anymore. And a balloon feature. A balloon payment is a payment at the end. They can't have a payment at the end, it's gotta be an annuity. You can't go over 30 years. You can't have points, which are fees of a sort, that exceeds 3% of the total loan amount. Also, interest rate is sometimes adjustable. You have to use the maximum interest rate, that may apply during the first five years, to define debt to income ratio. You have to verify the consumer's income and assets, and current debt obligations and ask whether the borrower has alimony or child support payments to make. And finally, they did not put a loan devalue ratio test. In other countries they'll say you can't loan more than 90% of the value of the house. QRM rules don't have that. Instead they have a debt to income ratio. So that is, you cannot have a debt which is more than 43% of the borrowers income. So that's QRM. And I'll end with that. These rules are kind of obscure. And I went over them though, because you're going to be buying a house. And how many years before you start buying houses? Won't be long. And you want to know these things. This is what you're going to get. You're going to get a no negative amortization, 30 year mortgage. With a debt to income ratio of less than 43%. And you know what questions they're going to ask. So this shows how regulated our economy is. It's a nice tie in to our next lecture on regulation.