The qualified residential mortgage rule that determines which privately issued mortgages are subject to risk retention has been on the regulatory backburner for months and may even be repealed.
The uncertainty surrounding how the rule will look has kept many traditional RMBS issuers sidelined. Fitch Ratings said in June 26, report that issuers looking to create securities that fall in the ORM box are waiting for the rule to be finalized before they come to market.
The problem is that federal regulators can't agree on the universe of mortgages that should be subject to the 5% risk retention requirement. As proposed back in April 2011, the QRM rule would require securitizers to retain 5% of the credit risk on loans that did not have a minimum downpayment of at least 20%.
This first proposal issued for public comment was universally panned by members of Congress, and consumer and civil rights groups, as well as lenders.
“There is talk of getting rid of the QRM rule,” one source told ASR's sister publication National Mortgage News. “It may be repealed if Congress ever gets around to passing a Dodd-Frank Act corrections bill.”
Housing and Urban Development secretary Shaun Donovan wants a QRM rule that does not restrict access to the “safe” loans that are being originated today. Last week, the HUD secretary said the QRM rules should be drafted to require risk retention only on the type of irresponsible loans originated during housing boom.
“Less than 15% of the loans originated in 2006 would qualify under even the broader definitions that are being considered for QRM,” Donovan said. However, some regulators want a narrower definition. “We need to remember that the goal of this debate” is not to place further limits on today’s tight credit standards.
The American Bankers Association wants regulators to rethink the QRM rule entirely or drop it. The trade group believes the rule needs to be substantially modified so it doesn’t place additional constraints on today’s conservative underwriting standards.
“At the end of the day, if the regulators can’t decide on major modifications to the QRM rule or not to issue a rule at all, then it is unlikely they will get anything right,” said ABA senior vice president Bob Davis. (Congress exempted Fannie Mae, Freddie Mac and Federal Housing Administration loans from DFA risk retention requirements.)
Meanwhile, it appears that the QRM rule has been overshadowed by its cousin—the qualified mortgage rule. The QM rule defines the boundaries of the private mortgage market and the QRM rule is supposed to determine which types of private loans would trigger risk retention.
Some regulatory experts have come to the conclusion that the QM rule (also mandated by the Dodd-Frank Act) is the more important of the two because it establishes an “ability to repay” standard.
Among other things, the QM rule will set the underwriting standards for acceptable lending practices as well as penalties for violations when mortgage bankers fail to consider the borrower’s ability to repay the loan. Lenders also face litigation risk for QM violations.
The six regulatory agencies, including HUD, that are assigned to finalize the QRM rule, earlier this year, decided to suspend their rulemaking effort until the Consumer Financial Protection Bureau finalizes its QM rule.