On QRMs and Dismissals

August 29, 2013 at 8:14 am Leave a comment

In honor of the kids going back to school in the next couple of weeks (this is the time of year that I realize the summer break is way too long), I’m going to start this morning’s blog with a quiz:

Is a QRM a(n):

a) autoimmune deficiency disease?

b) something you should avoid getting when you go away to college?

c) a penalty for failing to comply with basic underwriting standards? or

d) a qualified residential mortgage under the Dodd-Frank Act?

If you said d) you are correct and it is actually a good thing, at least based on my initial look at proposed regulations published jointly yesterday by federal regulators not including the NCUA.  In an attempt to ensure that corporations that create mortgage-backed securities have “skin in the game,” Dodd-Frank generally requires issuers of these securities to hold 5% of their investment in portfolio.  The statute made an exception for bonds comprised of qualified residential mortgages (QRMs).  The regulators were given responsibility for determining when a mortgage would qualify as a QRM with guidance that their definition of a QRM could not be more expansive than the CFPB’s definition of a qualified mortgage (QM).  The first proposal scared the heck out of the financial industry.  For instance, a mortgage would only qualify as a QRM if the borrower put 20% of the purchase price down.  With its proposal yesterday, calmer heads prevailed.  With the caveat that the devil is always in the details with this stuff, yesterday’s rule provides that if a mortgage satisfies the CFPB’s definition of a QM, then it is also a QRM.

Remember that even under the initial proposal, mortgages sold to Fannie or Freddie were already going to be considered QRMs.  But the concern has always been that the QRM standard would become the de facto underwriting standard for the entire mortgage industry, particularly if and when Fannie and Freddie are eliminated.

One of the root causes of the mortgage meltdown was the originating to sell business model.  Behemoths like Countrywide were making so much giving mortgages and selling them to investment banks that no one really cared if the mortgages themselves should have been granted in the first place.  Once purchased, mortgages were bundled into bonds, the revenue of which was based on mortgage payments.  The system worked great as long as people could afford to pay their mortgages, but as soon as the economy went South so did these mortgages.  If you are unfortunate enough to be holding any of these securities at the time of the crash, like some of our major corporates were, the securities became worthless.

Which brings us to the dismissal part of this blog.  Earlier this week, the Court of Appeals for the 10th Circuit held that NCUA could go forward with a lawsuit against several major banks claiming that they knowingly provided inaccurate information about the mortgage bonds they sold to U.S. Central, which of course went bankrupt after its mortgage-backed securities became worthless.  This is one of several lawsuits NCUA is bringing to recoup some of the corporate losses.  The banks had argued that NCUA had only three years from the day the bonds were purchased in 2006 and 2007 to bring these lawsuits.  NCUA argued that as the conservator for the corporates, federal law gave it the authority to bring these lawsuits under so-called extender statutes.  NCUA did not become U.S. Central’s conservator until 2009 and brought the lawsuit in 2011.  I know this is very dry stuff, but the bottom line is that NCUA can go forward with these lawsuits.  But don’t start counting your special assessment savings yet.  It is still far from certain that NCUA will be able to successfully win on this core argument.

On that note, have a great long weekend.  I’m taking tomorrow off, but I will be back Monday.

Entry filed under: Legal Watch, Regulatory. Tags: , , .

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Authored By:

Henry Meier, Esq., General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association.

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