The Comptroller of the Currency and the FDIC released proposed rules today regarding Qualified Residential Mortgages (QRMs), which will be exempt from the risk retention requirements tied to the Dodd-Frank legislation.
Essentially, QRMs may be securitized without any risk retention, while loans not exempt will require lenders to hold onto five percent of the mortgages they sell on the secondary market (skin in the game).
“And because risk retention is the rule’s focus, any exemption from risk retention is intended to be narrow, and include only loans of high credit quality,” said John Walsh Acting Comptroller of the Currency, in a press release.
“This should ensure that normal securitizations thrive because risk retention requirements are of a type, and in an amount, consistent with the protection investors will demand.”
Preliminary underwriting requirements for a QRM will look something like this:
- 20% down payment for purchase money mortgages
– If a purchase, no second mortgages
– 75% max loan-to-value ratio for rate and term refinances
– 70% max LTV ratio for cash out refinances
– 30-year max amortization
– Max debt-to-income ratio of 26/38 (no stated income loans)
– No negative amortization (option arms, etc)
– If an adjustable-rate mortgage, rate increase cannot exceed 2% in any 12-month period and 6% over the life of loan
– No prepayment penalties
– Total mortgage points cannot exceed three percent of loan amount
– Borrower cannot be 30 days or more past due on any debt obligation
– Borrower must not have been 60 days or more past due on any debt obligation within 24 months prior to loan closing
The takeaway: These are just some of the rules, so it’s clear the agencies want QRMs to play a very small role in the mortgage market.
Also note that FHA loans, as well as loans backed by Fannie Mae and Freddie Mac, are exempt from the risk retention rules, though that could change once rules are finalized.