Financial regulators on Tuesday finally released
the final rule defining Qualified Residential Mortgages (QRM). The definition is intended to determine which
loans are exempt from the risk retention requirements of the Dodd Frank Wall
Street Reform and Consumer Protection Act.
As expected, the final QRM is aligned
with the definition of Qualified Mortgages (QM) which defines how lenders
determine if a borrower has the ability to repay the loan and sets out a safe
harbor for lenders as they make that determination and underwrite the loan.
The regulatory agencies issuing the regulation
(Treasury, Housing and Urban Development, the FDIC, Securities and Exchange
Commission, Federal Housing Finance Agency, and the Federal Reserve) observed
in the preamble to the proposals presenting the rule the securitization markets
are an important part of the provision of credit to the nation's households and
businesses. "When properly structured,
securitization provides economic benefits that can lower the cost of credit."
Prior to the
financial crisis regulators observe that the markets were not properly
structured and investors were often at a disadvantage as they did not have the
same level of information about their investments as lenders and securitizers
who, in turn, did not have to be concerned about risk once loans were sold on
the secondary market.
In passing Dodd
Frank, Congress
attempted to address these problems by requiring that securitizers, retain an economic interest
in
the credit risk of the assets
they securitize, thus giving them an incentive to monitor and ensure its
quality. The regulatory agencies issued a proposal outlining
how this "retained risk" would work and which loans, qualifying as QRM, would
be exempt from the requirement.
The lengthy memorandum issued today, containing
the new rule and explaining the process of revision of the original QRM proposal
the regulators issued in 2011 notes that regulators received comments on that
proposal from over 10,000 persons and businesses.
The original proposal provided
a complete exemption from the risk retention requirements for asset-backed securities that are collateralized
solely by QRMs and
established the terms and
conditions under which a
residential mortgage
would qualify as
a QRM. The original proposal would generally have prohibited
QRMs from having product
features that were
observed to contribute significantly to the
high levels of delinquencies
and foreclosures since 2007 and included underwriting standards
associated with lower risk
of default.
The original proposal also provided that sponsors
would not have to
hold risk retention for securitized commercial, commercial real estate,
and automobile loans that
met proposed underwriting standards.
It also specified that loans eligible for purchase by Fannie Mae or
Freddie Mac would automatically meet the QRM definition.
It also provided several options from which sponsors could choose risk retention requirements, including retention
of either a 5
percent "vertical" interest in
each class of ABS interests issued in the
securitization or a 5 percent "horizontal" first-loss interest in the
securitization, and other options
designed to reflect market practice in asset-backed
securitization transactions.
The rule issued today defines QRM as follows. It is a "covered
transaction" that meets the general
definition of a QM which provides that the loan must have:
-
Regular periodic payments that are substantially equal;
-
No
negative amortization, interest
only or balloon features;
-
A maximum loan term of 30 years;
-
Total points
and fees that do not exceed 3 percent of the
total loan amount, or the applicable amounts specified for small loans
up to $100,000;
-
Payments
underwritten using the maximum
interest rate that
may
apply during the first five years
after the date on which the first
regular periodic
payment is due;
-
Consideration and verification
of the consumer's
income and assets, including
employment status if relied
upon, and current debt obligations, mortgage-related obligations,
alimony and child support; and
-
Total DTI ratio that does not exceed
43 percent
The agencies believe that a QRM definition aligned with
the definition of QM meets the
statutory goals and
directive of the legislation to limit
credit risk and promote sound underwriting. At the
same time, the agencies
believe this
definition will also meet
the
important goals of
preserving access to affordable credit for various types
of borrowers
and facilitating the return
of private capital to the mortgage market.
The final
definition of QRM does not incorporate either an LTV ratio requirement or standards related to a
borrower's credit history, such
as previously proposed.
The ability-to-repay rule is particularly noteworthy for requiring loan originators
to document income, debts, and other underwriting factors, which
should in turn
provide investors a more
complete set of information
on which
to
base their investment decision.
In adopting their QRM definition the
regulators said they recognize that mortgage and securitization market
conditions and practices change over time and will therefore review the definition
no later than four years from the effective date and every five years thereafter.
Federal Housing Finance Agency Director Melvin
L. Watt said in a statement following the release of the rule that, "Finalizing
this rule represents a major step forward to providing greater certainty to the
housing finance market and paves the way for increased participation by the
private sector.
Aligning the Qualified Residential
Mortgage standard with the existing Qualified Mortgage definition also means
more clarity for lenders and encourages safe and sound lending to creditworthy
borrowers. Lenders have wanted and needed to know what the new rules of the road
are and this rule defines them."
The National Association of Realtors®
also issued a statement through their president Steve Brown. It said in part, "Realtors are confident that
the new QRM rule will encourage sound and financially prudent mortgage
financing by lenders while also ensuring responsible homebuyers have access to
safe and affordable credit. The synchronization with the QM rule will provide
lenders with much needed clarity and consistency as they apply the new
standards to loan applications while also providing a framework to bring more
competition to the secondary mortgage market.
"Importantly, the final rule relies
on sound and responsible underwriting rather than on an onerous downpayment
requirement to qualify as a QRM loan. NAR strongly opposed earlier versions of
the rule that included 20 and 30 percent downpayment requirements, which would
have denied millions of Americans access to the lowest cost and safest
mortgages."