New research shows that only one-fifth of loans the GSEs purchase would meet the regulators’ definition for “qualified residential mortgages” (QRMs) and would be exempt from the 5% risk retention requirement in the Dodd-Frank Act.
Fannie Mae and Freddie Mac purchased nearly $12 trillion in single-family loans during a 13-year period ending in 2009 and only 19.8% of those loans met the proposed QRM test, according to data the regulators included in their 243-page proposed rule. The public comment period ends June 10.
But the GSEs last week received some good news from the regulators—as long as they operate in a conservatorship they are exempt from banking risk retention rules. Regulators recognized that GSE loan guarantees are a form of risk retention, which means the two will be exempt from risk retention — for now.
In other words, the proposal, if adopted, will have minimal effect on the market for years.
Still, critics of the proposal are complaining it will require securitizers to retain 5% of the credit risk on the vast majority of single-family loans, which could reduce the availability of financing and unnecessarily increase the cost of borrowing for many qualified homebuyers.
The problem is this: Fannie and Freddie are not going to be around forever. Legislative proposals are now being circulated to downsize and phase them out. All this has spurred industry groups to mount a vigorous lobbying effort to get mortgage insurance recognized as a form of risk retention.
Regulators are seeking comments on broadening the QRM definition to include loans with 10% down that are backed by mortgage insurance. But the proposed rule issued last week requires borrowers to put 20% down to get a qualified residential mortgage.
Borrowers have to come up with cash for the downpayment and the closing costs, which cannot be financed into the mortgage.
The borrower’s debt-to-income ratios cannot exceed 28% on the front end or 36% on the back end. In addition, a 60-day delinquency on any debt obligation in the previous 24 months can disqualify a borrower.
Consumer advocates argue that the QRM proposal would require a buyer to put up $43,000 in cash for the downpayment and closing costs to purchase a $172,000 house. They estimate it could take an average family 14 years to save that amount.
The Federal Deposit Insurance Corp. (FDIC) contends the QRM is “narrowly drawn” because the underwriting and product features lower the default risk to a level where risk retention is not necessary.
“I anticipate QRMs will be a small slice of the market, with greater flexibility provided for loans securitized with risk retention or held in portfolio,” FDIC chairman Sheila Bair said.
Critics contend Congress wanted the QRM to represent safe and prudently underwritten loans. “The proposal appears to define a riskless loan, not a prudent loan,” said Lewis Ranieri, the co-inventor of the mortgage-backed security. He warned it will push more borrowers into non-QRM loans who would normally qualify for a Fannie or Freddie product.
Ranieri told reporters the QRM definition will complicate the withdrawal of Fannie and Freddie from the mortgage market. “So much of the market becomes non-QRM eligible that the ability to withdraw the government is just that much more difficult and that much more stretched out,” he said last week.
Rep. Scott Garrett, R-N.J., introduced a bill last week that would subject Fannie and Freddie MBS to risk retention. The congressman chairs a House GSE subcommittee that is slated to mark up and vote on the GSE this week.
Meanwhile, the industry and consumer groups seem to have an ally at the Department of Housing and Urban Development (HUD). HUD secretary Shaun Donovan told a Mortgage Bankers Association panel that he wants to have a “robust discussion” on recognizing mortgage insurance as a form of risk retention.
“I personally thought it was very important that we have an alternative in the rule—that we look at a 10% downpayment requirement rather than just a 20% downpayment requirement,” the secretary said.
He warned that there are risks to drawing the QRM box too wide or too narrow. If it is too wide, “I don’t think securitization is going to come back because there won’t be the confidence out there that these are safe mortgages.”
The Securities and Exchange Commission, Federal Reserve Board, Federal Housing Finance Agency, Office of the Comptroller of the Currency, FDIC and HUD are participating the joint rulemaking. The comment period ends June 10.