Proposed Risk Retention Requirements Could Inhibit Return of Private Capital

Changes to risk retention requirements were proposed this week that would mandate a 5% capital reserve for non-government backed mortgages. Qualified Residential Mortgages, or QRMs, will be exempt from the requirements.

What is a QRM, exactly? In order for a loan to qualify as a QRM, the mortgage requires a 20% down payment from the borrower, including those with private mortgage insurance. Loans backed by the Federal Housing Administration and those with government guarantees—including those sold to Fannie Mae and Freddie Mac while they are in conservatorship—will be exempt, however.

“It’s important for people to understand that the QRM rule is going to be a small slice of the market,” Federal Deposit Insurance Corp. Chairman Sheila Bair said in a statement to the FDIC. “It doesn’t mean everybody is going to have to comply with these standards with a mortgage going forward.”

With almost all loans (95% by a recent government estimate) having some form of government guarantee today, it means that almost all loans will be exempt from the new requirements that fall on the lender and the borrower. Some say this will steer lenders away from private capitalthe opposite effect the FHA said recently it hoped to promote by phasing out Fannie Mae and Freddie Mac. In February, Housing Commissioner David Stevens said bringing private capital back into the mortgage markets is a critical component to further recovery of the broader economy.

“Some reform was necessary in light of the subprime bubble and the resulting foreclosure crisis,” said the American Bankers Association in response to the proposal. “The risk retention rule proposed on March 29th, however, is the wrong solution. It will make it harder to unwind the federal support for housing finance, inhibit the return of the private market, and harm prospective borrowers’ ability to get credit down the road.”

The proposal is being considered by several government agencies including the Federal Reserve, FDIC, SEC, FHFA, HUD and The office of the Comptroller of the Currency. If approved, the agencies will publish a notice of proposed rulemaking for public comment.

See Chairman Bair’s statements to the FDIC.

Written by Elizabeth Ecker

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