Mortgage insurer Genworth Financial (GNW) submitted a letter to federal regulators Monday, arguing the qualified residential mortgage rule should include loans with down payments as low as 5%, as long as underwriting guidelines and mortgage insurance are incorporated.
The QRM standard required by Dodd-Frank has yet to be culled down into a series of final rules. The current proposal necessitates a 20% down payment and makes no mention of mortgage insurance as a potential buffer against losses. A QRM can be securitized without the issuer retaining 5% of the credit risk. Genworth argues the “20%, or alternative 10% down payment options under QRM are too narrow and won’t significantly improve loan performance.” Instead, the mortgage insurer believes the current proposal will lead to higher costs for the borrower and reduce the availability of mortgages, prolonging the housing slump by making the market unattractive to investors and private capital. “There is a proven model for responsible, safe, low down payment lending, and it includes requiring some borrower down payment, performing a thorough prudential underwrite of the borrower, and obtaining mortgage insurance to mitigate the risk of default,” said Kevin Schneider, president of Genworth’s U.S. mortgage insurance business. Genworth recommends another formula for the QRM: One where down payments as low as 5% are included and where total debt-to-income ratios are no higher than 45%. The company cited a study by Promontory Financial Group that shows of the 5.7 million loans originated from 2003 to 2007, those with low down payments and mortgage insurance had lower default rates than uninsured loans with low down payments and a “piggyback” second mortgage. Loans with second mortgages had a default rate about 21% greater than loans with mortgage insurance, according to the study. The role of private mortgage insurance has been the subject of much scrutiny since the release of the QRM proposal earlier this year. While some analysts argue against the ongoing issuance of private mortgage insurance in favor of a strict 20% down requirement, others say without more options, the current QRM will lock millions of borrowers out of the market. Last week, Genworth used $375 million worth of shares in its Canadian subsidiary to provide capital for its collapsing U.S. mortgage insurance business in the second quarter. The move raised concern among investors over why Genworth would continue holding fast to a segment that doubled the company’s losses for the three months ended June 30.
Write to Kerri Panchuk.
