The proposed alignment of the qualified residential mortgage (QRM) rule with existing mortgage risk retention standards will ease the underwriting and securitization of prime borrower loans but are the rules too lenient on borrowers?

Fitch Ratings said in a report today that it expects that the alignment of QRM with qualified mortgage (QM) rules would help to ease the transition to the new rules for originators, as well as reduce the cost impact. Securitization issuers are exempt from the 5% credit risk retention rule on loans that are considered QRM.  

The definition does not include mortgage down-payment requirements, a shift from the original 20% down-payment proposal as long as the QM definition is satisfied and basic debt-to-income (DTI) requirements are met by borrowers.  The FDIC board approved the revised proposed rule and federal agencies are asking for feedback by Oct. 30.

Fitch said that “the inclusion of an onerous down payment minimum of as much as 30% could have led to a tightening of credit that may have slowed the revival of the prime RMBS market.”

But the American Securitization Forum said in a press release that securitization investors aren’t as impressed with the lack of borrower accountability in the new proposal.

“Just as it is important for RMBS issuers to retain risk, it is equally important for borrowers to have down payment “skin in the game” for a loan to achieve QRM status,” said ASF executive director, Tom Deutsch. “Not requiring any down payment hollows out the objective of the risk retention requirements.”

The draft rule, if adopted, would exempt banks from a requirement to retain a portion of originated mortgages on the balance sheet, as long as certain minimum standards are met in underwriting the loan. As currently proposed, any loan that conforms to qualified mortgage rules adopted earlier this year by the Consumer Financial Protection Bureau will be eligible for exemption from risk retention requirements.

Regulators have also proposed alternative QRM rules that fall more in line with what institutional investors are looking for, which require qualifying loans to have a maximum LTV of 70%, while also meeting the existing QM definition. 

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