Federal banking regulators began leaking copies of their much anticipated mortgage risk retention rules on Monday — with very few surprises contained in the final proposed language except for one: where Fannie Mae and Freddie Mac fit in.
In issuing the rule banking regulators — for now — put an end to the debate over whether low downpayment loans guaranteed by Fannie and Freddie are exempt from the 'qualified residential mortgage' test. (They are.)
The proposed rule provides that the government sponsored enterprises will be able to "satisfy the risk retention requirement through their guarantees (which cover 100% of principal and interest) as long they continue to operate under conservatorship or receivership" according to a summary of the risk retention rule provided by Washington sources to National Mortgage News and other media outlets.
The proposal creates an exemption from the 5% risk retention requirement for low downpayment mortgages mandated by the Dodd Frank Act.
In a nutshell, regulators define a QRM mortgage as one where a downpayment of at least 20% is made, and the borrower has front-end and back-end debt-to-income ratios of 28% and 36% respectively. (If these standards are not met, the issuer of any MBS backed by such loans must retain 5% of the risk.)
But for the mortgage insurance industry the writing is on the wall: The Federal Deposit Insurance Corp. and its regulatory brethren will not recognize the value of mortgage insurance coverage in determining a QRM.
The proposal states that on a QRM loan, "The LTV ratio must be calculated without considering mortgage insurance," adding that although MI "protects investors from losses when borrowers default, and thus lessens the severity of the loss, the statute directs the agencies, in developing the QRM criteria, to consider whether mortgage insurance reduces the risk that default will occur in the first place."
The language is potentially a blow to MI firms, but is not predicted to cripple the industry. Said one observer: "It's not what we wanted, but we'll see how this plays out."
Federal banking regulators are slated to approve the rule this week and issue it for public comment.
To read the risk retention summary click here:
