Federal regulators have issued their long-awaited revised qualified residential mortgage (QRM) proposal. The proposal, which implements Section 941 of the Dodd-Frank Act, was issued jointly by the FDIC, Fed, OCC, SEC and, with respect to portions addressing residential mortgages, the FHFA and HUD (Agencies).
Section 941 generally requires the retention by the sponsor of not less than 5% of the credit risk of assets that collateralize asset-backed securities (ABS). Section 941 added new Section 15G to the Securities and Exchange Act of 1934 that exempts from the risk retention requirements, among other things, securitizations that consist exclusively of QRMs. Section 15G directed the Agencies to develop a definition of QRM that is no broader than the CFPB’s definition of “qualified mortgage” (QM).
The revised proposal includes major modifications from the Agencies’ original 2011 proposal. The original proposal was strongly criticized by industry, drawing over 10,500 comments. Comments on the revised proposal are due by October 30, 2013.
The major changes relating to the QRM exemption are:
- A QRM would be defined as a mortgage meeting the requirements for a QM as defined by the CFPB’s ability-to-repay rule, which is effective January 10, 2014.
- As expected, the proposed QRM definition includes a total debt to income ratio (DTI) that does not exceed 43%, including mortgage-related obligations, instead of the front- and back-end DTI ratios of 28% and 36%, respectively, originally proposed.
- The proposed downpayment requirement was eliminated.
The Agencies also invite comment on an alternate approach, a so-called “QM-plus,” which would add the following standards to the QM criteria:
- A maximum 70% loan to value ratio (LTV). (Based on the significant opposition to a 20% down payment requirement, the reaction to the maximum 70% LTV element will likely be less than ecstatic.)
- For purchase money loans, the collateral must be a first lien on the borrower’s principal dwelling and there could be no other recorded or perfected liens of which the originator has knowledge.
- For refinances, there could be junior liens but the LTV requirement must be met on a combined basis.
- The originator must determine that the borrower:
– was not currently 30 or more days past due on any debt obligation;
– had not been 60 or more days past due on any debt obligations within the preceding 24 months;
-must not have, within the preceding 36 months, been a debtor in a bankruptcy proceeding or been subject to a judgment for collection of an unpaid debt; and
-must not have had, within the preceding 36 months, personal property repossessed, any one-to-four family property foreclosed upon, or engaged in a short sale or deed in lieu of foreclosure.
- Loans that qualify as QMs because they are eligible for GSE purchase or fall within small creditor or balloon loan exceptions would not be QRMs.
The CFPB has indicated it believes there is room for a robust lending market outside of QM. However, given that under the proposal a non-QM loan would also be a non-QRM and therefore, absent an available exemption, trigger risk retention, the jury remains out on the level of non-QM/QRM lending that will exist.
As required by Section 15G, the Agencies have also proposed or re-proposed a number of additional exemptions from the risk retention requirements. They include, among others:
- Residential, multi-family, or healthcare facility mortgage loan securitizations that are themselves, or that are collateralized by assets that are, insured or guaranteed by the U.S. or an agency of the U.S. (other than FNMA, FHLMC or the Federal Home Loan Banks);
- Re-securitization transactions that are collateralized solely by servicing assets and tranches of ABS transactions that comply with, or are exempt from, the risk retention requirements of the current proposal and structured as a single class of ABS interests entitled to the pass-through of principal and interest payments received on the underlying ABS;
- ABS issued or guaranteed by any state, or by any political subdivision of a state or territory, or by any public instrumentality of a state or territory that is exempt from the registration requirements under Section 3(a)(2) of the Securities Act of 1933;
- ABS that are collateralized by obligations of the U.S. government or an agency thereof or assets that are fully guaranteed by the U.S. government or an agency thereof;
- ABS collateralized solely by seasoned loans; and
- FDIC-sponsored securitizations when acting as conservator or receiver.