WASHINGTON—The Mortgage Bankers Association is worried that federal regulators will set tough underwriting standards along with a large downpayment requirement in defining “qualified residential mortgages” that are exempt from pending risk retention rules.
Qualified residential mortgages will become a “core” product, according to MBA president and chief executive John Courson. For non-QRM loans, the Dodd-Frank Act requires issuers of mortgage-backed securities to retain 5% of the credit risk.
The way the QRM definition is crafted will determine the liquidity of the mortgage product, as well as the price and cost of those loans, said Courson. “This is going to be a defining moment for the future of the mortgage market, consumers and lenders,” he added.
The MBA is hopeful the rules will not be “proscriptive” in terms of setting out specific underwriting standards that limit a lender’s ability to respond to a borrower’s particular situation. “Underwriting is an art, not a science,” Courson told reporters during a briefing on the state of the mortgage industry.
Setting a minimum 20% downpayment requirement on qualified residential mortgages will impact a substantial number of borrowers, particularly first-time homebuyers and low- to moderate-income borrowers, the MBA executive said. “They will have to seek higher-cost loans on the private market or go to the Federal Housing Administration,” said the MBA chief.
One regulator told National Mortgage News that the agencies are not looking to make QRM loans a small, illiquid segment of the mortgage market. Still, industry officials are very concerned about the downpayment requirement.
If the regulators adopt a 20% downpayment standard, the MBA believes the final rule should allow high loan-to-value loans with mortgage insurance to meet the QRM test. Without mortgage insurance, the criteria will be too tight, “pushing more and more demand to FHA,” MBA chairman Michael Berman warned. (The tax deduction for mortgage insurance premiums expired at the end of 2010. The MBA wants Congress to re-instate the deduction.)
Separately, the American Bankers Association is urging banking regulators to tailor the QRM definition so a majority of loans originated by depository institutions are exempt from risk retention. It is unclear when regulators will issue the risk retention rule that is supposed to go into effect April 17. There appears to be disagreements over the QRM definition and whether to include new servicing standards in the rule.
