Federal regulators need to create a definition for "qualified residential mortgage" that is safe for homebuyers, but not so safe that it funnels most of the business into the Federal Housing Administration insurance program.
"Unless the QRM definition is calibrated properly, there is a danger that the FHA program could be overutilized," the Mortgage Bankers Association warns in a new letter sent to regulators.
Congress created the qualified mortgage exemption in the Dodd-Frank Act to facilitate the securitization of safe and well-underwritten loans. Qualified mortgages are exempt from risk retention so that issuers—including the GSEs—do not have to retain 1% to 5% of the credit risk when they securitize such products.
But the FHA single-family program is exempt from risk retention.
If the QRM test is drawn too tight, "lenders will turn to FHA because there is nowhere else to go," said MBA senior vice president Steven O'Connor. "It can get to the question of how big of a role do you want FHA to play in the marketplace," he said.
The FHA already has a 30% share of the mortgage market while most the remainder is dominated by the GSEs, namely Fannie Mae and Freddie Mac, according to share numbers compiled by National Mortgage News.
"The potential impact on the availability of credit stemming from the QRM risk retention exemption cannot be overstated," MBA says in its letter.
Federal banking agencies as well as the Securities and Exchange Commission, Federal Housing Finance Agency and Department of Housing and Urban Development are working on qualified mortgage standards with a final rule due April 1. (Treasury is pushing regulators to issue a draft proposal before Thanksgiving, according to industry sources.)
The MBA is urging regulators to be flexible so that three-year ARMs and certain interest-only loans can be classified as qualified mortgages. The trade group also wants regulators to allow lender discretion "within acceptable parameters" which means "compensating factors" might be used to qualified certain borrowers.
Congress passed the risk retention rules to prevent—among other things—the mass production of subprime loans and payment-option ARMs.
At the urging of industry groups, lawmakers included the QRM exemption from risk retention in the Dodd-Frank bill. Several mortgage insurance companies and community lenders have conducted an analysis of loan products and features that were common during the 2003-2007 housing and mortgage boom.
They identified eight standards that should shape the QRM definition which include full documentation of borrower income and assets, total debt-to-income ratio of 45% or less, and mortgage insurance for products where the combined LTV is greater than 80%.
Contrary to the MBA's recommendations, MIs and community lenders found that interest-only loans and ARMs that adjust before the seventh year should not be classified as qualified mortgages. But they agreed with the MBA that negative amortization is a risky feature.
An analysis of 17 million mortgages using CoreLogic data show mortgages that meet the proposed QRM standards outperformed nonqualified mortgages by more that a 2-to-1 ratio.
Nearly 9% of qualified mortgages originated in 2006 are 90 days or more past due, compared to 22.4% of nonqualified mortgage that are seriously delinquent or in default.
"The analysis demonstrates that "loans that satisfy the QRM definition will perform well without imposing additional restrictions such as minimum downpayments or reliance on FICO scores that would severely limit access to credit for low- to moderate-income borrowers, borrowers with nontraditional credit and other traditionally underserved markets," the joint letter says.
The Community Mortgage Banking Project, Community Mortgage Lenders of America, Essent Guaranty Inc., Genworth Financial Inc., Mortgage Guaranty Insurance Corp., Radian Guaranty Inc., Republic Mortgage Insurance Co. and The PMI Group Inc. signed the Nov. 8 letter.
While the rule for the QRM is expected to be finalized by April, the statutory deadline for completing the joint rule making on risk retention is mid-July. MBA maintains the two rules should be "synchronized" and regulators should issue the rules at the same time.
