The Federal Reserve, in conjunction with five other regulatory agencies, has put forth a proposed rule requiring that sponsors of asset-backed securities (ABS) retail at least 5 percent of the credit risk associated with the underlying assets. The proposed rule exempts ABS that are U.S. government guaranteed and mortgage backed securities (MBS) that are comprised exclusively of "qualified residential mortgages" (QRMs).
The goal of the proposed rule suggests that banks and other issuers of securitized loan will have a greater incentive to monitoring the quality of the loans securitized if they are required to retain a certain amount of the risk after the securities are bundled and sold.
The QRM exemption of the rule would be defined as a first-lien, closed end mortgage of a term no longer than 30 years, with a down payment of at least 20% (equity requirements on refinances would likely be higher). A temporary exemption would exclude loans sold to Fannie Mae or Freddie Mac for as long as they remain in government conservatorship.
Since HECM MBS' are currently issued by Ginnie Mae and guaranteed by the federal government, they would qualify as exempt mortgages.
Some opponents of the rule have raised concerns that the QRM rules will create a new narrow definition of prime mortgages that a small number of consumers would qualify for. The undesirable result of the rule would then serve to increase those borrowers who could not meet the stringent standards of the QRM.
"Related to risk retention for residential mortgages and the qualified residential mortgage (QRM) exemption, we do have concerns about the rigid and highly prescriptive nature of the proposed rule." said John A. Courson, President/CEO of the Mortgage Bankers Association. "We believe that such a narrow construct of the risk retention exemption would limit mortgage opportunities for qualified borrowers more than it would reduce the number of problem loans. Further, if the QRM were to be enacted as proposed, it could dramatically limit the role of independent mortgage banks and community lenders, who either don't have the balance sheet capacity to hold loans or the capital to hold in reserve as retained risk, but have long histories of originating safe and well-underwritten mortgages."
The federal agencies are requesting comment on the proposed rule though June 10 2010. Following the comment period, the agencies will work towards issuing a final rule that incorporates appropriate changes identified through the comment period.
The federal agencies sponsoring the propsed rule:
Department of the Treasury
Federal Reserve System
Federal Deposit Insurance Corporation
U.S. Securities and Exchange Commission
Federal Housing Finance Agency
Department of Housing and Urban Developement