Why QRMs are Important to You

October 22, 2014 at 8:33 am Leave a comment

Yesterday, the FDIC became the first agency to finalize qualified residential mortgage regulations mandated by Section 941 of the Dodd-Frank Act.  To understand how big a deal this is, think of those ridiculous Hollywood disaster movies where Earth narrowly avoids a speeding meteor the size of the Empire State Building that will end life as we know it. Yesterday’s announcement will have no direct impact on credit unions.  In fact, the NCUA is the only financial regulator not required to join in issuing QRM regulations because credit unions don’t issue asset-backed securities.  Nevertheless, yesterday’s actions have important consequences for any institution providing mortgages.

Here is some background. The CFPB was responsible for regulations defining qualified mortgages (QM). These are the regulations that have already taken affect. This blog discusses Qualified Residential Mortgages (QRM).

One of the major causes of the mortgage meltdown was an explosion of mortgage-backed securities.  Banks and mortgage companies lowered lending standards in part because of the insatiable appetite of Wall Street for mortgages.  Investment banks would package mortgages into securities, which were sold with painful consequences for many investors including the failed Corporates.  Critics of the system argued that securitizers, generally the investment banks that created these bonds, needed to have a financial stake in the bonds that they were selling.

Section 941 of the Dodd-Frank Act responded to this concern by establishing minimum risk retention requirements for issuers of mortgage-backed securities.  Specifically, securitizers are required to retain at least 5% of any asset-back security they issue.  But an important exception was made. Joint regulations were to be issued by the federal banking agencies, HUD and the FHFA defining what constitutes a qualified residential mortgage within 270 days of Dodd-Frank’s enactment (so much for deadlines).  The definition is crucial because the 5% risk retention requirement does not apply to mortgage-backed securities comprised of QRMs. Congress also mandated that the QRM definition could be no broader than the CFPB’s definition of a qualified mortgage (QM).

Here comes the speeding meteorite part of today’s blog. The regulators responded to their mandate by proposing that QRM mortgages be required to have a maximum loan-to-value ratio of 80%. Imagine a world in which only mortgage applicants with at least 20% to put down on a home could qualify for a mortgage. Level-headed people responded to this suggestion by proclaiming “the death of the American Dream.”

Yesterday’s actions officially put an end to this game of chicken with the trade-off that the CFPB is even more powerful than ever before. Why? At the end of the day, the regulators decided that a QRM is any mortgage that meets the Bureau’s definition of a qualified mortgage. This means that if you want the ability to sell your mortgages to a secondary market participant, your mortgages must meet either the CFPB’s qualified mortgage standards or be eligible for sale to the GSEs. Remember that you don’t have to underwrite to QM standards so long as you can document why a member has the ability to repay her mortgage loan and you are willing to retain the mortgage.

One editorial comment. The regulators did the right thing yesterday, but yesterday’s announcement is another example of how Dodd-Frank does precious little to address the underlying causes of the Great Recession. If you want to avoid reckless underwriting in the future, then by definition that means imposing more stringent underwriting standards.

Entry filed under: Economy, Mortgage Lending, Regulatory. Tags: , , .

Two Really Boring but Important Compliance Tidbits The Biggest News this Week

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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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