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Ready or Not Mortgage Bankers ... Here Comes the QRM

Mar 30, 2011
Black and Hispanic borrowers are still more likely to be denied on their mortgage applications

The Federal Reserve Board (FRB) has proposed a rule that would require sponsors of asset-backed securities (ABS) to retain at least five percent of the credit risk of the assets underlying the securities. The rule, which will be proposed jointly with five other federal agencies, would provide sponsors with various options for meeting the risk-retention requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act. In drafting the proposed rule, staff at the FRB and at the other agencies sought to ensure that the amount of credit risk retained is meaningful, while taking into account market practices and reducing the potential for the rule to negatively affect the availability and cost of credit to consumers and businesses. "The goal of the proposed rule released today is to provide clarity and rules of the road to the securitization markets," said U.S. Department of Housing & Urban Development (HUD) Secretary Shaun Donovan. "The proposed rule is one part of the Administration’s goal of bringing private capital back into the housing finance system." As required by the Dodd-Frank Act, the proposed rule includes a variety of exemptions from these requirements, including an exemption for U.S. government-guaranteed ABS and for mortgage-backed securities that are collateralized exclusively by residential mortgages that qualify as "qualified residential mortgages" (QRMs). The plan would require a minimum 20 percent downpayment for QRMs, that would exempt lenders from forthcoming risk retention rules under the Dodd-Frank Act. "The rule before the Board today proposes new standards for retention of credit risk to help ensure that securitizers will hold 'skin in the game' which will align their interests with those of bondholders," said Sheila C. Bair, chairman of the Federal Deposit Insurance Corporation (FDIC). "This will encourage better underwriting by assuring that originators and securitizers can not escape the consequences of their own lending practices." The proposal would establish a definition for QRMs—incorporating such criteria as borrower credit history, payment terms, downpayment for purchased mortgages, and loan-to-value (LTV) ratio—designed to ensure they are of very high credit quality. The proposed rule would also allow Fannie Mae and Freddie Mac to satisfy their risk-retention requirements as sponsors of mortgage-backed securities (MBS) through their 100 percent guarantees of principal and interest for as long as they are in conservatorship or receivership with capital support from the U.S. government. "The proposed very narrow QRM definition will allow very few potential homeowners to qualify," said Lewis Ranieri, who pioneered mortgage-backed securities. "As a result, it will complicate the withdrawal of the Government’s guarantee of the mortgage market. I fear it will also delay the establishment of broad investor confidence necessary for the re-establishment of the RMBS market." "Related to risk retention for residential mortgages and the qualified residential mortgage exemption, the MBA has concerns about the rigid and highly prescriptive nature of the proposed rule," said John A. Courson, president and chief executive officer of the Mortgage Bankers Association (MBA). "We believe that such a narrow construct of the risk retention exemption would limit mortgage opportunities for qualified borrowers more than it would reduce the number of problem loans. Further, if the QRM were to be enacted as proposed, it could dramatically limit the role of independent mortgage banks and community lenders, who either don't have the balance sheet capacity to hold loans or the capital to hold in reserve as retained risk, but have long histories of originating safe and well-underwritten mortgages." Comments to the proposed rule must be received by June 10, 2011. The notice will be published in the Federal Register after approval from all agencies including the Office of the Comptroller of the Currency, the U.S. Securities and Exchange Commission, the Federal Housing Finance Agency, the FDIC and HUD. "Requiring a high downpayment would disproportionately harm first-time homebuyers, who have limited wealth and on average account for 40 percent of home-buying activity," said Barry Rutenberg, first vice chairman of the National Association of Home Builders (NAHB). "It would take an average family 12 years to scrape together a 20 percent downpayment. Borrowers who cannot afford to put 20 percent down on a home and who are unable to obtain FHA financing will be expected to pay a premium of two percentage points for a loan in the private market to offset the increased risk to lenders, according to NAHB economists. This would disqualify about five million potential homebuyers, resulting in 250,000 fewer home sales and 50,000 fewer new homes being built per year."  
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