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A New Qualified Residential Mortgage Rule for the US?
August 28, 2013
Since the US Dodd-Frank Act proposed rules for “Qualified Residential Mortgages (QRM)” in 2011 that would decide whether sponsors of securitization transactions would need to retain risk in those transactions, a fierce debate has ensued about the restrictiveness of those rules, in particular the requirement for a 20 percent down payment to qualify for QRM status.
In January of this year, Consumer Financial Protection Bureau defined a “Qualified Mortgage (QM)” in terms of underwriting standards that will go into effect on January 10, 2014. The QM rules require, among others, that borrowers must provide income documentation to show that they can repay the loan, and that their debt-to-income ratio does not exceed 43 percent. There are no rules requiring lenders to ask for a set down payment amount. http://www.hofinet.org/news/article.aspx?id=129
Today, six federal agencies -- the Board of Governors of the Federal Reserve System, the Department of Housing and Urban Development, the Federal Deposit Insurance Corporation, the Federal Housing Finance Agency, the Office of the Comptroller of the Currency, and the Securities and Exchange Commission -- jointly proposed that the QRMs would have the same meaning as the term QM defined by the Consumer Financial Protection Bureau.
The draft rule, if adopted, would exempt sponsors of securitization transactions from a requirement to retain a portion of originated mortgages on the balance sheet, as long as certain minimum standards are met in underwriting the loan. As currently proposed, any loan that conforms to CFPB qualified mortgage (QM) rules will be eligible for exemption from risk retention requirements.
Furthermore, the original QRM proposal generally measured compliance with the risk retention requirements based on the par value of securities issued in a securitization transaction and included a so-called premium capture provision. The agencies are now proposing that risk retention generally be based on fair value measurements without a premium capture provision.
There is no change in the rule that recognizes the full guarantee on payments of principal and interest provided by Fannie Mae and Freddie Mac for their residential mortgage-backed securities as meeting the risk retention requirements while Fannie Mae and Freddie Mac are in conservatorship or receivership and have capital support from the U.S. government.
The new proposal also requests comment on an alternative definition of QRM that would utilize the CFPB's QM standards, but adds a 30 percent down payment requirement. That idea is likely to be far less popular with commenters.
The proposal is open for public comment until Oct. 30.
Richard Cordray, director of the Consumer Financial Protection Bureau, has mixed feelings about the re-proposed qualifies residential mortgage rule. "I want to emphasize that the CFPB's ability to repay rule was consciously designed to protect consumers from unaffordable credit," Cordray said. "It is not itself a credit-risk rule designed for investor protection. So we will be keenly interested to see and monitor how closely these goals align as the mortgage market continues to evolve and potential other changes such as [government-sponsored enterprise] reform may occur over time."