Regulators vote for 20% down on QRM

Federal regulators voted in favor of the initial mortgage risk-retention proposal Tuesday. Qualified residential mortgages exempt from the rule will require a 20% down payment. Under the Dodd-Frank Act, federal regulators were required to write a rule clarifying which loans lenders and securitizers would have to retain 5% of the risk on after securitization. Regulators will take comments on the proposal (located here) over the next 60 days. Federal Deposit Insurance Corp. Chairman Sheila Bair said in a statement released after the vote Tuesday that she wanted to make sure the QRM exception loans were narrow. “The QRM is the exception, not the rule, and as such, I believe should be narrowly drawn,” Bair said. “Properly aligned economic incentives are the best check against lax underwriting.” According to the proposal, a QRM can only be written to a borrower who has never had a 60-day delinquency in his or her credit history. Any loan insured or guaranteed by the U.S. government, including Fannie Mae, Freddie Mac and the Federal Housing Administration will be exempt from the risk retention rule, according to the proposal. Early indications showed these entities would would be exempt. The QRM standards do not include a requirement for mortgage insurance, however, regulators will leave this provision open for comment. Specifically, they asked commentators to provide what type of eligibility standard should be in place for MI. “The definition makes no allowance for increases in the (QRM loan-to-value ratio) where the difference is backed by private mortgage insurance, but the proposal requests comment on various alternatives in this area,” said Acting Comptroller of the Currency John Walsh. “Private mortgage insurers with adequate financial resources might provide investor protection against losses, and applying conservative loan-by-loan underwriting criteria for mortgages would foster securitization of high-quality assets.” Regulators did make room for new servicing standards that require financial incentives for servicers to consider options other than foreclosure. The proposal also requires servicers to treat a QRM loan without regard to any particular tranche of investors, and it requires these companies to disclose any second-lien interests if they service the first lien. Servicers will be required to inform investors how a second-lien will be dealt with if the first-lien is restructured. But Bair reiterated that the QRM should not dominate the market. However, she will hear comments on how a 20% down payment would affect low- and moderate-income borrowers. “This does not mean that under the rule, all homebuyers would have to meet these high standards to qualify for a mortgage,” Bair said. “On the contrary, I anticipate that QRMs will be a small slice of the market, with greater flexibility provided for loans securitized with risk retention or held in portfolio.” Write to Jon Prior. Follow him on Twitter @JonAPrior.

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