The National Association of Mortgage Brokers (NAMB) has issued a Call to Action to its membership to contact their legislators and voice their displeasure with Section 941 of the Dodd-Frank Act pertaining to risk retention and the Act’s definition of qualified residential mortgages (QRMs). Section 941 states that any mortgage lender who securitizes mortgage loans must retain a five percent risk retention. What will be exempt from the five percent risk retention will be QRMs. The driving force behind the risk retention rule is to discourage lenders from making risky loans and selling them to investors, with the end result of avoiding another collapse of the mortgage market as last seen in 2008. It is the opinion held by trade organizations such as NAMB that abiding by the current definition of QRM will further devastate the already fragile U.S. housing market.
Major points of contention regarding the definition of QRMs include:
►QRMs, as defined by Section 941 of the Dodd-Frank Act, will require a 20 percent downpayment.
►The QRM requires a debt-to-income (DTI) ratio of 28/36.
►The current definition of QRM states that the borrower cannot be more than 30 days overdue on any debt obligation. Something as small as a $25 medical collection bill on a person with a credit score in excess of 800 may prevent that potential homebuyer from qualifying for a residential mortgage under Section 941 of the Dodd-Frank Act.
►The Dodd-Frank Act’s definition of a QRM also states that anyone with an outstanding debt that is more than 60 days past due in a timeframe of the previous two years will also not qualify for a residential mortgage.
Analysis by the Santa Ana, Calif.-based analytics firm CoreLogic found that the definition of QRM, specifically the clause related to a 20 percent downpayment, would have rejected 39 percent of all mortgages and refinances issued in 2010 that were approved with less than a 20 percent downpayment.
The fear is that lenders who need to securitize loans under the five percent risk retention rule may have to raise rates by approximately two percent or more, thus further stifling an already struggling housing market.
NAMB also fears that a greater migration toward Federal Housing Administration (FHA) loans will cause Congress to further tighten FHA underwriting standards, creating a ripple effect in the FHA market through increased mortgage insurance (MI) premiums and increased minimum downpayment requirements.
“The loans that we are approving today are not the loans that caused crisis in the mortgage market,” said Mike Anderson, CRMS, Government Affairs Committee chair of NAMB, who submitted a letter to Rep. Steve Scalise (R-LA) on the QRM issue. “It was sub-prime, stated-income, no doc loans, and other exotic products that led to the mortgage market collapse.”
Other mortgage industry trade groups have also voiced their opposition on the QRM issue to the heads of the U.S. Department of the Treasury, U.S. Department of Housing & Urban Development (HUD), Federal Reserve Board (FRB), Federal Housing Finance Agency (FHFA), Federal Deposit Insurance Corporation (FDIC), Office of the Comptroller of the Currency (OCC), Securities & Exchange Commission (SEC) and Office of Thrift Supervision (OTS) in a joint letter dated May 13, 2011. The groups behind the May 13th letter on risk retention include the American Bankers Association (ABA), Mortgage Bankers Association (MBA), National Association of Home Builders (NAHB), National Association of Realtors (NAR), National Council of La Raza and the National NeighborWorks Association, among others.
“In reviewing the notice of proposed rulemaking (NPRM), it is clear that if finalized, it would have an enormous impact on the availability and costs of mortgage credit and the housing market for years to come,” said the letter signed by the 15 trade groups.