TheMReport — News and strategies for the evolving mortgage marketplace.
Issue link: http://digital.themreport.com/i/431978
Th e M Rep o RT | 31 O r i g i nat i O n s e r v i c i n g a na ly t i c s s e c O n da r y m a r k e t ORIGINATION the latest Fed, sec approve Finalized Qrm rule By aligning QRM and QM definitions, regulators hope to bring more certainty to the market. t he residential mortgage loan risk retention rule, known as the "qualified residential mortgage" (QRM) rule, was approved by the U.S. Federal Reserve Board and the Securities and Exchange Commission (SEC), the last two of six federal agencies to approve the rule, according to the Fed. The rule, which was first pro- posed in 2011, requires lenders to retain at least 5 percent of a loan's risk when packaging mortgages to sell to investors in the second- ary market. Loans that meet the criteria of a QRM, though, are exempt from the risk retention requirement. "The final rule before the board would require sponsors of secu- ritizations to retain an economic interest in the assets that they securitize," Fed Chair Janet Yellen said. "Often called 'skin in the game,' risk retention requirements better align the interests of spon- sors and investors by providing an economic incentive for spon- sors to monitor the quality of securitized assets." The QRM rule is one of the bigger provisions mandated by the Dodd-Frank Act, with co-author Barney Frank stating in interviews following the bill's passage that risk retention is "the single most important part of the bill." The road to finalizing a QRM rule has been a bumpy one. Regulators—including FDIC, HUD, the Federal Reserve, SEC, the Office of the Comptroller of the Currency (OCC), and the Federal Housing Finance Agency (FHFA)—first proposed a draft rule in 2011. The group released a second proposal in 2013, removing some of the more contentious provi- sions—in particular, a requirement that banks must retain risk on mortgages with down payments lower than 20 percent—in re- sponse to industry concerns. The finalized rule is more closely aligned with the Consumer Financial Protection Bureau's (CFPB) qualified mort- gage (QM) rule implemented ear- lier this year. Both rules exclude mortgages with debt-to-income ratios exceeding 43 percent, and both prohibit loans with riskier features like balloon payments or terms longer than 30 years. Regulators expressed optimism that the finalized rule will give the housing finance sector greater cer- tainty, opening the door for more activity from private investors. "Lenders have wanted and needed to know what the new rules of the road are, and this rule defines them," said FHFA Director Mel Watt. Industry groups were also op- timistic about the announcement, praising policymakers' efforts to avoid confusion by lining up QM and QRM together. "This rule was required by Dodd-Frank to ensure that loans sold into the secondary market are properly underwritten, a goal which the QM rule also helps to ensure. It is appropriate and good policy to align the two," said Frank Keating, president and CEO of the American Bankers Association. "This will encour- age lenders to continue offering carefully underwritten QM loans, and avoid placing further hurdles before qualified borrowers, allow- ing them to achieve the American dream of homeownership." The Fed, HUD, FDIC, FHFA, OCC, and SEC all issued the final rule jointly. The risk retention framework in the proposal the agencies issued in August 2013 is largely retained in the final rule. The sponsors of asset-based securities (ABS) are generally required to retain at least 5 percent of the credit risk associated with the underlying assets, and the rule prohibits the sponsor from transferring or hedg- ing the credit risk. Securitizations of QRMs are exempt from the risk retention requirement. The regulatory agencies are required to review the definition of QRM no later than four years after the effective date of the rule, with regards to securitization of residential mortgages. From that point, they are required to review the definition every five years. Each agency is allowed to request a review of the definition of QRM at any time. The final rule for residen- tial mortgage-backed securities (RMBS) will go into effect exactly one year after being published in the Federal Register.