THE BASIS POINT

A Word On Forcing Lenders To Retain 5% Of Sold Loans

Here’s a good primer on the Qualified Residential Mortgage (QRM) regulatory initiative that requires loan originators to retain at least 5% of any mortgages they securitize so they have some skin in the game.

Interestingly, some mortgage banks are cutting QRM deals now where they’re retaining more like 8% of their holdings, and in some cases, investment banks on the other side of those deals want to share in that first tranche of the mortgage pool—not just because it’s riskier and therefore pays more, but because when investment banks look at the quality of paper certain mortgage banks are originating, they see lower likelihood of default. It’s a good sign that appetite for risk is returning, but as with any investing activity, quality of new securitizations all comes down to quality of the originating lenders and their loans.