Congress wanted to create a large category of high-quality residential mortgages that would be exempt from risk retention and easily securitized – but banking regulators have taken the opposite approach, according to Sen. Johnny Isakson, R-Ga.

In a proposed rule issued in May, federal regulators floated the idea of a narrow 'qualified residential mortgage' exemption with a 20% downpayment requirement. Isakson believes the downpayment requirement should be 5%.

"The regulators have turned the QRM on its head in order to preserve a vibrant non-QRM market, which is, frankly backwards," Isakson said in his prepared testimony.

The Georgia senator, one of the primary authors of the QRM amendment, is scheduled to testify before a House Financial Services subcommittee Thursday afternoon.

In his testimony, he suggests that a "5% downpayment is the right number" for the QRM exemption, which will ensure sufficient originations to support securitization of QRM-eligible loans.

"For housing to be restored to solid ground, we want to see a large and vibrant QRM market, not the other way around,” he says. “Regulators should write the standard as Congress intended, and let the market – not Congress or the regulators – determine the relative size of the market for a new, high quality QRM mortgage security.”

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