The American Securitization Forum (ASF) reiterated its support for retention requirements tailored to different securitized asset classes to regulators. 

The ASF expressed its views in a letter it submitted today to joint regulators who are charged with implementing the section of the Dodd-Frank Act dealing with risk retention.

In the letter, the trade group also spelled out a series of specific criteria used to establish the definition for a Qualified Residential Mortgage (QRM).

It  also proposed various options sponsors could use to satisfy risk retention obligations for RMBS. Additionally, the ASF will also be submitting additional letters in coming days for auto loans, student loans, credit cards and ABCP.

The Dodd-Frank Act charges the Federal Reserve Bank, the Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency, the Securities and Exchange Commission, the Federal Housing Finance Agency and the Department of Housing and Urban Development (HUD) with developing a definition of a QRM which would exempt qualifying RMBS from risk retention requirements.

The group's members, such as institutional investors and RMBS issuers, developed a series of standards, such as income and asset verification, minimum borrower equity and debt-to-income ratios, that mortgages would have to meet  to be included in a qualifying QRM RMBS.

This issue is gaining attention now because some in the industry expect regulators might issue a draft of the proposed QRM rule before Thanksgiving, according to ASR sister publication National Mortgage News (NMN).

The ASF has come up with a definition seeking to significantly strengthen mortgage pools and also ensure that appropriate credit can resume flowing to American homebuyers.

“The ASF strongly supports encouraging sound underwriting decisions by improving the alignment of interests between RMBS issuers and investors,” said Tom Deutsch, executive director of the ASF. “However, in order to avoid jeopardizing the fragile recovery of the RMBS market and promote the flow of affordable credit to prospective homeowners, it is essential that a balanced definition is developed for the Qualified Residential Mortgage to ensue creditworthy borrowers qualify for the lowest mortgage rate possible.”

The ASF said that high-quality underwriting should result in sound mortgage securitizations. Both investors and issuers agreed that appropriate verification of income, assets and employment are key in determining an appropriate QRM.

Other areas for further analysis and discussion, according to the ASF, are appropriate sizes of borrower down payments and debt levels, which includes mortgage debt and other consumer debt.

The ASF also believes some types of loans, such as option ARMs and balloon loans, should be entirely excluded from the QRM definition given the historically poor performance of these collateral types.

“We agree with experts, including John Dugan, the former Comptroller of the Currency, that the most direct way to align incentives in the RMBS market and ensure high quality underwriting is through the establishment of minimum standards, including income verification, meaningful down payments and reasonable debt-to-income ratios,”  Deutsch added.

The ASF also thinks that various risk retention alternatives should be available to RMBS that do not qualify, taking into account critical accounting and risk-based capital factors.

These include a “horizontal slice” option where a sponsor retains an equity interest or a piece of the “first loss” tranche. There is also the “vertical slice” option where a sponsor retains ownership of a portion of each tranche in an RMBS as well as the “representative sample” option where a sponsor retains a randomly selected number of loans from the securitized pool.

The ASF cited a Federal Reserve report to Congress that urged regulators to look at credit risk retention rules applied uniformly across assets of all types as unlikely to achieve the stated objective of the Dodd-Frank Act.

Meanwhile, three senators are urging regulators to consider the QRM analysis prepared by several mortgage insurance firms and community mortgage lenders.

NMN reported today that the U.S. senators are trying to convince regulators of the soundness of the industry's analysis of the default risks on certain loan products and features in drafting a rule that will exempt QRMs from risk retention rules.

In a letter, Senators Mary Landrieu, D-La., Kay Hagan, D-N.C., and Johnny Isakson, R-Ga., said they reviewed the analysis prior to drafting the QRM amendment that was approved by the Senate last summer and attached to the Dodd-Frank Act.

"It is our clear legislative intent" that those indicators of lower default risk "must be considered," the senators said.

The analysis compared the performance of 17 million loans during the 2003-2007 housing and mortgage boom.

Using CoreLogic loan data, they identified eight standards that should shape the QRM definition, including: full documentation of borrower income and assets; total debt to income ratio of 45% or less; and mortgage insurance for loans when the combined LTV is greater than 80%.

The analysis also showed that negative amortization loans, interest-only loans and ARMs that adjust before the seventh year should not be classified as qualified mortgages.

"It is important that this [QRM] definition be drawn broadly enough to support the recovery of the housing market, while remaining rooted in empirically sound underwriting and product standards that will incent lenders to originate prudently underwritten loans and avoid increased costs to homebuyers associated with the risk retention requirements," the senators said in the Nov. 8 letter.

 

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