Relaxing regulatory parameters for "qualified residential mortgages" could significantly increase the percentage of loans that are exempt from risk retention, according to a new comment letter from Amherst Securities Group.
As proposed with a 20% down payment requirement and back-end debt-to-income limit of 36%, just 31% of loans guaranteed by Fannie Mae and Freddie Mac in 2009 would have been exempt from risk retention.
This is "particularly frightening," ASG analysts say in their correspondence, "as 2009 was a year in which the GSEs produced very high quality product."
Using only Freddie loan data, the mortgage securities experts ran an analysis and found that only 38% of the single-family loans Freddie purchased or guaranteed in 2009 would meet the QRM definition (as proposed) and be exempt from risk retention. (Being exempt means the MBS issuer does not have to retain 5% of the credit risk on the loans.)
The QRM definition is "far too restrictive" and the "two most binding constraints are the DTI and loan-to-value ratios," the ASG comment letter says.
However, federal regulators are seeking comments on lowering the QRM down payment requirement to 10% and relaxing the DTI ratios. And many industry and consumer groups are urging the regulators to adopt these less restrictive requirements for the QRM.
If a 41% back-end DTI ratio is used, then 45% of Freddie loans would be exempt from risk retention. "If the risk retention rules also allow LTVs up to 90% for purchase and rate/term refis, 61% of [the loans] would have qualified" for an exemption, the June 2 comment letter from ASG says.
The comment period on the risk retention rule ends June 10.