Proposed QRM Rule Released, 20% Down Payment Required, by Michael Kraus, Totalmortgage.com


New proposed risk-retention rules, required as part of the Dodd-Frank financial reform were released today by the FDIC, according to a report from Fox News.

The new regulations would require mortgage originators to retain capital reserves equal to 5% of all but the safest mortgages. The mortgages that are exempt from the risk retention guidelines are termed “qualified residential mortgages” or QRMs. In order to qualify as a QRM, there must be a down payment of at least 20%. Additionally, anyone who has ever had a 60 day delinquency in their credit history will not qualify for a QRM. FHA loans will be exempt from the QRM rules, and Fannie Mae and Freddie Mac mortgages may also be exempt so long as these agencies are in government conservatorship.

As we’ve discussed in the past, there could be a number of side effects for borrowers, among them increased mortgage rates for anyone who doesn’t qualify for a QRM. Another one of the side effects could be that the FHA Mortgage Share could increase significantly as these loans are exempt from the QRM rule.

Sheila Bair, Chairman of the FDIC, spoke at an FDIC board meeting today and addressed the proposed rule. She said:

“In thinking about the impact of this proposed rule, we need to keep in mind the following facts:
First, the QRM requirements will not define the entire mortgage market, but only that segment that is exempt from risk retention. Lenders can – and will – find ways to provide credit on more flexible terms, but only if they then comply with the risk retention rules.
Second, what matters to underserved borrowers is not just the volume of credit that is available, but also the quality of that credit. More than half of the subprime loans made in 2006 and 2007 that were securitized ended up in default, which hurt both borrowers and investors and triggered the financial crisis. By aligning the interests of borrowers, securitizers and investors, our new rules will help to avoid these outcomes and keep default rates at much lower levels. They will also help avoid another securitization-fed housing bubble which made home prices unaffordable for many LMI borrowers.
Finally, the private securitization market, which created more than $1 trillion in mortgage credit annually in its peak years of 2005 and 2006, has virtually ceased to exist in the wake of the crisis. Issuance in 2009 and 2010 was just 5 percent of peak levels. This market needs strong rules that assure investors that the process is not rigged against them. The intent of this rulemaking is not to kill private mortgage securitization – the financial crisis has already done that. Our intent is to restore sound practices in lending, securitization and loan servicing, and bring this market back better than before.”
The majority of homeowners with mortgages in this country would be unable to refinance into a QRM due to a lack of home equity. Additionally, the vast number of people who have gone through foreclosure or have even been two months delinquent would be unable to get a QRM. All of these people will likely pay increased mortgage rates if they were to refinance or get a new mortgage. I totally understand the reasoning behind the QRM. It also strikes me as being a classic case of closing the barn door after the horse has escaped. What are your thoughts on the proposed rule? Let me know in the comments section below.

QRM Rule Could Cause FHA Mortgage Share to Skyrocket, by Michael Kraus , Totalmortgage.com


Recently I’ve spent a good deal of time discussing upcoming changes to risk-retention rules regarding mortgage origination that could potentially increase the cost of mortgages for a great many people.

Under the Dodd-Frank regulatory reform, loan originators will be required to retain capital reserves equal to five percent of all but the safest mortgage loans. The safe loans that will be exempt from this risk retention are called “qualified residential mortgages” (QRMs). The definition for a QRM is expected to be released in the next couple of weeks, but the expectation is that in order to be a QRM, a mortgage loan will need a 20% downpayment. This means that those that do not have a down payment of this size will be subject to increased mortgage rates to make up for the risk retention on the part of the lender. The Treasury, the Federal Reserve, the FDIC, the FHA, and other regulatory and governmental agencies are responsible for defining a QRM.

The rule is intended to ensure that lenders have “skin in the game”. In the past, some mortgage originators would make risky loans, and in turn bundle them into mortgage backed securities and sell them to investors, effectively passing all the risk to another party. These practices were partially to blame for the meltdown of the housing market. Theoretically, the QRM rule would end these risky lending practices.

There is an exception to the QRM rule, and that is that loans issued or guaranteed through government agencies (not Fannie Mae or Freddie Mac) are to be exempt from the rule. See section 941 of Dodd-Frank, specifically (ii):

‘‘(G) provide for—‘‘(i) a total or partial exemption of any securitization, as may be appropriate in the public interest and for the protection of investors;

‘‘(ii) a total or partial exemption for the securitization of an asset issued or guaranteed by the United States, or an agency of the United States, as the Federal banking agencies and the Commission jointly determine appropriate in the public interest and for the protection of investors, except that, for purposes of this clause, the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation are not agencies of the United States;

‘‘(iii) a total or partial exemption for any assetbacked security that is a security issued or guaranteed by any State of the United States, or by any political subdivision of a State or territory, or by any public instrumentality of a State or territory that is exempt from the registration requirements of the Securities Act of 1933 by reason of section 3(a)(2) of that Act (15 U.S.C. 77c(a)(2)), or a security defined as a qualified scholarship funding bond in section 150(d)(2) of the Internal Revenue Code of 1986, as may be appropriate in the public interest and for the protection of investors; and

‘‘(iv) the allocation of risk retention obligations between a securitizer and an originator in the case of a securitizer that purchases assets from an originator, as the Federal banking agencies and the Commission jointly determine appropriate.

As FHA mortgages would be exempt from QRM, it is very easy to imagine a situation where FHA loan volume greatly increases as a result of the rule change. The FHA only requires a down payment of 3.5%, but I can easily picture those with less than 20 percent down opting for an FHA mortgage in order to avoid higher mortgage rates resulting from the risk-retention requirements (obviously it will depend on whether or not the increased rates cost more or less than the FHA’s up front mortgage insurance premiums, which remains to be seen).

In any case, this could put the FHA in a tough spot, as it is already undercapitalized, and was never really intended to do the volume of loans that it is doing presently. The VA and USDA could also see increased loan volume, but the increase wouldn’t be as great as with the FHA, as these loans are restricted to a smaller group of people.