Fitch Ratings said that uncertainty surrounding the Dodd-Frank Act, particularly in terms of the qualified residential mortgage (QRM) definition, has led many traditional RMBS issuers to postpone their issuance plans.
This proposed regulation comprises both a risk-retention portion and the concept of premium capture reserve account. Deals backed solely by QRMs will be exempt from the risk-retention requirement. Thus potential RMBS issuers who do not want to create securities outside the QRM box are waiting to come to market with deals. This is why the final definition is significant, the rating agency said. Additionally, the proposed premium capture reserve account can result in valuation and accounting challenges and slow the flow of securitized transactions.
Fitch expects that the Consumer Financial Protection Bureau (CFPB) will publish a revised proposal impacting QRMs in the third quarter. On May 31, the CFPB started another comment period ending July 9 specifically about the mortgage-ability-to-pay provision, which is expected to constrain Dodd-Frank’s treatment of QRMs. Then, this revised proposal will undergo further public comment and could possibly be finalized after the presidential election or will be subject to further revision.
“We believe the new proposal will largely resemble the initial proposal put forth in 2011,” Fitch analysts wrote. However, the rating agency said that certain aspects of the new proposal will probably still be closely scrutinized and might be changed further, including the part on premium capture.
All of these delays and associated uncertainties may prevent the the RMBS market's strong return, especially in terms of the activity from commercial bank issuers that have contributed significantly to the sector.