Federal Deposit Insurance Corporation

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

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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.

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FDIC Sues WaMu Execs and Their Wives, by Kirsten Grind, Bizjournals.com

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The Federal Deposit Insurance Corp. filed suit against former executives of Washington Mutual, including former CEO Kerry Killinger, former President Steve Rotella, and their wives, in a case that seeks to recover unspecified damages at trial.

The suit, filed in the U.S. District Court in Western Washington, also seeks to freeze the estates of the Killingers and Rotellas. It also names David Schneider, the former head of WaMu‘s home loans division, who now works at JPMorgan Chase.

Earlier, the FDIC said it would seek $1 billion in damages, but the amount wasn’t specified in the suit.

In its 63-page complaint, the FDIC said that it’s suing the former, “highly-paid” WaMu executives to hold them responsible for losses in WaMu’s mortgage division. WaMu was closed by the federal Office of Thrift Supervision and its assets turned over to the FDIC in September 2008, marking the largest bank failure in U.S. history.

The complaint alleges that Killinger, Rotella and Schneider caused WaMu “to take extreme and historically unprecedented risks with WaMu’s held-for-investment home loans portfolio. They focused on short term gains to increase their own compensation, with reckless disregard for WaMu’s longer term safety and soundness.”

The executives and their attorneys could not immediately be reached for comment. In a statement, the FDIC said it files suits against former officers directors and other “professionals of failed institutions “when the case has merit and is expected to be cost effective.”

“This is done on behalf of creditors of the failed institution,” the FDIC said in its statement. “The FDIC investigates every failure to determine whether there is a solid basis for legal action and a sound source for recovery.”

The suit does not specify damages, although the FDIC previously said it would seek to recover up to $1 billion from all three former WaMu executives.

The suit also alleges that Killinger and his wife, Linda, sought to defraud WaMu’s creditors by transferring their multi-million dollar home in Palm Beach, Calif., into two personal trusts in August of 2008, a month before the bank failed. Linda Killinger was appointed trustee of those accounts. Killinger also transferred half of the couple’s property in the Highlands area of Seattle into a trust in Linda Killinger’s name.

Both these actions were “made with actual intent to hinder, delay or defraud Kerry Killinger’s present and future creditors,” the FDIC suit alleges. The government agency notes that Killinger faced numerous lawsuits at the time, and WaMu had lost more than $9 billion in a bank run.

Similarily, the suit alleges that Rotella and his wife, Esther, transferred their house in Orient, New York, into two residential trusts in the spring of 2008, and Rotella also transferred $1 million to Esther Rotella after WaMu failed, according to the complaint. “… the transfers were not disclosed to or were concealed from his present and future creditors,” the suit alleges.

KIRSTEN GRIND covers banking, finance and residential real estate for the Puget Sound Business Journal. She is currently on book leave.

 

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