There are 7 days left for public comment on the Qualified Residential Mortgage (QRM) proposals for how lenders must keep skin in the game when securitizing mortgages. QRMs are defined as mortgages that will not require any form of risk retention by any entity, and below is a list of 9 loan characteristics for the current QRM definition.
Mortgage industry lobbying efforts continue. A letter signed by 163 House members urges federal regulators to loosen the QRM definition and over one-third of the U.S. Senate (a bi-partisan group) have written a letter to the FDIC, OCC, Fed, and other federal regulators urging they adopt a less restrictive definition of a QRM.
The folks in mortgage trenches are watching this closely. The proposed risk-retention rules permit “securitizers” to allocate a portion of the credit risk which must be retained to the originators of the securitized assets.
Because this definition of “originator” refers to the person or entity that creates a loan, only the original creditor of a loan (not a subsequent purchaser) is an originator for the purpose of this rule.
But anyone in the industry knows that there is absolutely no way that an originator can set aside 5% in capital for every loan that doesn’t fit into the guidelines, with the result being that few institutions will continue to offer various products.
There are some clever ways around the provisions, but really, do regulators want to encourage that kind of thinking?
Here are 9 highlights of the proposed definition of a QRM which, since no risk will be allocated to the originator of such assets, is of particular concern to creditors seeking to avoid risk-retention altogether.
(1) QRM eligible loans must be a closed-end, first lien mortgage or refinance of a one-to-four family property (at least one unit must be the borrower’s principal dwelling).
(2) A mortgage loan may qualify as a QRM only if the originator verifies and documents within 90 days prior to closing that the borrower satisfies the following credit history requirements: not currently 30 or more days past due on any debt obligation; not 60 or more days past due on any debt obligation within the preceding 24 months; and, not a debtor in a bankruptcy proceeding, not subjected to property repossession or foreclosure, not engaged in a short sale or deed-in-lieu of foreclosure and not subject to a federal or state judgment for collection of unpaid debts within the preceding 36 months.
(3) QRM eligible loans may not contain any of the following payment terms: terms allowing interest-only payments or negative amortization; any balloon payment; terms allowing the annual rate of interest to increase in excess of 2% (200 basis points) in any twelve month period and 6% (600 basis points) over the life of the mortgage transaction; and any prepayment penalty.
(4) QRM eligible loans’ LTVs may not exceed a proposed ratio cap of 75% on rate and term refinances and 70% for cash-out refinances.
(5) For purchase transactions, the proposal requires borrowers to provide a cash down payment in an amount equal to at least the sum of: closing costs payable by borrower; 20% of the lesser of estimated market value determined by appraisal or the purchase price; and if the estimated market value determined by appraisal is less than the purchase price, the difference between those amounts.
(6) QRM eligible loans’ front-end ratios may not exceed 28% and back-end rations may not exceed 36%. Originators must verify and document a borrower’s monthly gross income, monthly housing debt and monthly total debt in accordance with the verification and documentation standards of the HUD Handbook.
(7) QRM eligible loans’ total points and fees payable by the borrower in connection with the mortgage transaction may not exceed 3% of the total loan amount.
(8) QRM eligible loans may not be assumable by any person who was not a borrower under the original mortgage transaction.
(9) QRM eligible loans’ documents must contain a provision obliging the creditor to have servicing policies and procedures to promptly initiate activities to mitigate risk of default on the mortgage loan and to take loss mitigation actions.
Granted, there are more provisions, and most, if not all, well-intended – but what will the consequences be on the mortgage & housing industry, as well as the economy?
Senators & Congressman ended the letter by stating that “Congress included the QRM to exempt safe, well-underwritten mortgages that have stood the test of time from the risk retention requirement. We urge you to follow our intent as you modify the proposed risk retention rule.”