Lenders would be exempt from risk retention ratios on MBS issuance if they originate low-risk, fully documented mortgages under an amendment Senator Johnny Isakson, R-Ga., plans to offer when the Senate takes up the regulatory reform bill.

Under the amendment, "qualified mortgages" would be exempt from a 5% risk retention requirement when a lender sells loans in the secondary market.

Qualified mortgages could not have interest-only payments, balloon payments or negative amortization.

In addition, any mortgages with loan-to-value ratios exceeding 80% must have private mortgage insurance. The subprime mortgage crisis resulted from "shoddy underwriting," Isakson said.

Qualified mortgages would mark a return to the "gold standard" and the "good old days" when mortgages were well underwritten, he added. Mortgage funders and investment bankers would have to retain 5% of the credit risk on riskier mortgages, however.

Borrowers that take out safer loans "should not have to pay the higher interest rates that would result from across-the-board risk retention," said Glen Corso, managing director of the Community Mortgage Banking Project.

Industry groups are concerned that risk retention will increase the cost, and reduce the availability of credit to homebuyers. For over a year, the industry has been seeking support for a qualified mortgage exemption.

Subscribe Now

Access to a full range of industry content, analysis and expert commentary.

30-Day Free Trial

No credit card required. Access coverage of the securitization marketplace, including breaking news updated throughout the day.