The Consumer Finance Protection Bureau’s choice of how to define the Qualified Mortgage and Qualified Residential Mortgage standards is a key factor in the future of the mortgage-backed securitization market, according to Deutsche Bank’s (DB) outlook for 2013.
Both Dodd-Frank standards may set the ground rules for originating and eventual securitizing new loans, which effects the supply of agency and private MBS.
Simply put, all loans wrapped in government-sponsored enterprise securities receive both QM an QRM status as long as the GSEs operate under government control. It's the private market that could use some guidance.
While new issue private-label RMBS market activity remains subdued, it is expected to increase to $15 billion next year, according to Standard & Poor's ratings service.
"Agency issuance continues to dominate the market, but several issuers are accumulating collateral," according to industry reports.
QM standards define underwriting criteria, ensuring that a borrower has a "reasonable ability to repay the obligation." This definition restricts loan originations associated with higher default rates.
The main issue of defining the QM standard is whether the CFPB will use the safe harbor or rebuttable presumption standards in the application of the QM rule — both standards provide legal protection to the borrower.
Implementing safe harbor would increase the scope of QM lending because of the increased protected afforded. Therefore, Deutsche believes the debt to income ratio is the most significant part of the QM interpretation, given that a low DTI would disqualify a large pool of potential borrowers from eligibility.
A reasonable solution, the bank analysts state, would be a middle ground deal where originators received safe harbor for loans made below a "bright line" DTI threshold, whole loans qualified for QM status about the DTI limit would receive rebuttable presumption treatment.
"This type of resolution should be constructive for the agency MBS basis as supply would diminish as a result of the alternate securitization outlet under QM, diminishing supply and driving spreads tighter," the report stated.
QRM loans are similar to QM standards with an addition set of loan-to-value and credit-based criteria. The advantage of adjustable-rate mortgages is that when securitized they are not subject to 5% risk retention rule.
The working definition of a ARM LTV is the most contested point. Increasing LTV would have the most profound impact on increase eligibility of QRM loans.
"The QRM definition must be significantly loose to include a meaningful percentage of the mortgage universe but sufficiently narrow that investors in QRM securitizations have confidence that the probability of default is fairly low under the new standards," the report said.
The other issue at hand is the concept of premium capture, giving the concept of 5% risk retention for non-QRM securitization is misleading in that issuers have to retain 100% of all premium plus 5% of the securitization.
"Getting the QRM definition right will be crucial to reviving a non-agency MBS market that will pump private capital back into the mortgage market," the report stated.