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Investments

QRM proposal caters to private sector

No downpayment requirement spells private capital comeback

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The proposed rule for the treatment of a qualified residential mortgage is a victory for private residential mortgage issuers and investors, experts studying the private- label RMBS markets say.

The expected alignment of QRM rules with existing mortgage risk-retention standards mandated by Dodd-Frank will likely reduce uncertainty for players in this space and should also support stronger participation in jumbo loan activity by banking institutions, analysts note.

Since the Federal Housing Administration is permanently exempt from QRM and the government-sponsored enterprises are exempt while in conservatorship, the only part of the market that is initially subject to the rule revision is the private-label market, Keefe, Bruyette & Woods RMBS experts pointed out. 

"A benign QRM would be a positive for the mortgage insurers, but we think this outcome is largely anticipated by the market," stated KBW analysts Bose George, Jade Rahmani and Ryan O’Steen.

Additionally, sources cited in a Bloomberg article noted the Federal Housing Finance Agency is planning to reduce conforming loan limits this October, which would increase the size of the private label market and be a positive for securitizers such as Redwood Trust (RWT), Two Harbors Investment (TWO) and PennyMac Mortgage Investment Trust (PMT).

The originally proposed 20% downpayment requirement could have reduced the volume of mortgage insurance business once the GSEs were no longer in conservatorship — assuming they had a capital requirement of below 5% at that time — a benign rule eliminates this risk, KBW analysts pointed out.

On a similar note, Fitch Ratings expects that an alignment of QRM and QM rules would help to ease the transition to the new rules for originators, as well as reduce the cost impact.

"Most of the existing prime jumbo originators have been implementing technology and internal methodologies to meet the requirements of QM," said Fitch Ratings directors Christopher Wolfe, Roelof Slump and Bill Warlick.

They added, "However, the uncertainty over QRM had posed some logistical challenges."

Under the Dodd-Frank bill, mortgage securitizers would be required to hold 5% of the credit risk of securitization if the mortgages did not meet a certain standard of quality, which would make them QRM.

With QRM and conforming loan limits correlating with one another, this implies that regulators are serious about enticing private capital back into the market, Amherst Securities Group senior managing director Laurie Goodman said.

"This the most private-label RMBS friendly set of rules that the regulators could have proposed," she concluded.

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