Congress never intended federal regulators to set high down payment requirements on 'qualified residential mortgages,' according to three senators who wrote the original QRM language.
Senators Mary Landrieu, D-La., Kay Hagan, D-N.C, and Johnny Isakson, R-Ga., took the lead in crafting the QRM provision that exempts certain safe, well-documented mortgages from the 5% risk retention requirement in the Dodd-Frank Act. In a new letter to banking regulators they write: "As the authors of the QRM provision, we can assure you that, although there was a discussion of about whether the QRM should have a minimum down payment, in negotiations during the drafting of our provision we intentionally omitted such a requirement."
As reported by National Mortgage News, regulators are moving toward incorporating a 20% downpayment requirement in the QRM definition, though it is unclear at this time what figure they eventually will settle on. Also undetermined is whether low downpayment loans with private mortgage insurance would qualify for an exemption from risk retention.
"The QRM framework set forth in the statute specifically contemplates the inclusion of low-downpayment loans, provided they have mortgage insurance or other forms of credit enhancement," the senators say in their Feb. 16 letter.
The senators are urging regulators to adhere to the legislative language and consider "underwriting and product features" with historically low default risks in crafting the QRM definition.
Meanwhile, at a recent Senate Banking Committee hearing, FDIC chairman Sheila Bair told Sen. Isakson that the QRM definition will not apply to all mortgages. Portfolio lenders and securitizers that opt for 5% risk retention will not be affected.
"We are unable to document that PMI lowers default risk," said Bair. "We just can't find it. We do have a correlation between LTV and loan performance," Bair said. She noted the agencies will be seeking comment on this issue.
Sen. Isakson said he will provide historical data that shows tightly underwritten loans with private mortgage insurance perform well.
