Federal regulators are working toward a very narrow definition of “qualified residential mortgage” (QRM) that would force securitizers of high-quality loans to retain 5% of the credit risk.
Only well-underwritten mortgages with 20% downpayments would be classified as QRMs and be exempt from risk retention.
Lower downpayment loans with private mortgage insurance could not meet the QRM test — though MI lobbyists hope to change this by the time a final rule is drafted.
But a narrow QRM will not have an immediate impact on the current market because the two largest issuers of MBS — namely Fannie Mae and Freddie Mac — are exempt from the risk retention rule while in conservatorship.
Sources indicate that a tentative agreement between the Federal Reserve, Office of the Comptroller of the Currency and Federal Deposit Insurance Corp. (FDIC) would exempt the two government-sponsored enterprises, which currently control 75% of the mortgage market.
Such an exemption is likely to upset many in Congress. In passing the Dodd-Frank Act last summer, the lawmakers exempted Federal Housing Administration (FHA) loans from risk retention but not GSE loans.
Congress added the QRM exemption so that Fannie, Freddie and private issuers will securitize loans that are considered safe for consumers and meet tough underwriting standards. For other loans, Congress wants “skin in the game” to discourage the securitization of risky mortgages.
The Securities and Exchange Commission, Department of Housing and Urban Development and Federal Housing Finance Agency still have to sign off on the risk retention rule.
But Sen. Johnny Isakson, R-Ga., and many industry groups are hot about the 20% downpayment requirement. Sen. Isakson noted that the regulators are making it harder for first-time homebuyers to get a conventional loan and will push more borrowers to FHA. “We will be turning our back on 50 years of history in America, where PMI has been used to satisfactorily insure risk and insure qualified lending,” Isakson said.
The Georgia senator sent the FDIC a report on the performance of 30 million loans originated from 2002 to 2008 that was compiled by CoreLogic for Genworth Financial, an MI company. The historical data shows well-underwritten loans with private mortgage insurance have performed well, according to Glen Corso, managing director of the Community Mortgage Banking Project.
But the FDIC contends mortgage insurance does not reduce the likelihood of default.
“The assertions of the regulators that MI does not lower the risk of default is completely untrue,” Corso said. The Genworth report “demonstrates very clearly that mortgage insurance significantly lowers the risk of default.”
The American Bankers Association (ABA)contends the 20% downpayment will unnecessarily constrict mortgage credit. “We will argue that it should be lowered,” said ABA executive vice president Bob Davis.
He noted the risk retention rule also includes underwriting requirements — debt-to-income ratios, credit scores and other variables — besides the 20% downpayment.
“Why you shouldn’t be able to have a lower downpayment with mortgage insurance escapes us,” Davis said.