Regulators are mulling a 20% down payment requirement for loans considered qualified residential mortgages, meaning the lender must retain some risk in any loans with less paid up front. But whether or not the private market is willing to fill the gap and take the risk is up in the air. The Dodd-Frank Act called for the QRM rules to be set by federal banking agencies, the Department of Housing and Urban Development, and the Federal Housing Finance Agency 270 days after the signing of the bill. That will be sometime around April 28, 2011. According to Dodd-Frank, only those loans set within the parameters established by regulators can be sold or securitized without either the lender or issuer retaining the risk of those loans in the future. Federal Deposit Insurance Corp. Chairman Sheila Bair said regulators are looking at loan-to-value ratios and other aspects while developing the rule. "I think you'll see a balanced approach," Bair said while speaking at the Mortgage Bankers Association summit in Washington last week. "We're looking at the 80% LTV as an industry norm. I think that worked pretty well." While the rulemakers work to define the appropriate range for the rules, others are concerned over who would fill the nonconforming loan gap. "The question is what happens to those with less than 20% down. Some regulators, in our view, believe the private sector will respond with a home loan product for consumers with between 5% and 19% down," said the Washington, D.C., policy think tank MF Global. But these loans will most likely be priced like a Federal Housing Administration mortgage and would be more expensive for homebuyers, MF Global said. Lenders and issuers may have to make representations and warranties to investors, possibly creating "a situation where less-than-perfect borrowers have no ability to get mortgages, which could make an already tight mortgage market even tighter," MF Gobal said. However, those actually in the private sector are more confident, and two years removed from the financial crisis, some are ready for that risk. They just need to know the rules before they jump back in. "Investors looking for yield will always be in the market for nonconforming risk based pricing, from quality management teams with consistent underwriting and quality control standards," J.T. Smith, chief investment officer for boutique investment bank Aristar Funding Corp., said. Smith added that it wasn't the downpayment that caused housing problems in the U.S. He said lax regulations kept investors in the dark on how proliferate certain risky mortgages had become led the to the market's downfall. "The private sector will always step up, as long as regulators don’t overreact," Smith said. Write to Jon Prior. Follow him on Twitter: @JonAPrior