Three U.S. senators are urging federal regulators to consider industry analysis of the default risks on certain loan products and features in drafting a rule that will exempt "qualified residential mortgages" from risk retention rules.
In a letter, Senators Mary Landrieu, D-La., Kay Hagan, D-N.C., and Johnny Isakson, R-Ga., say they reviewed the analysis prior to drafting the QRM amendment that was approved by the Senate last summer and attached to the Dodd-Frank Act.
"It is our clear legislative intent" that those indicators of lower default risk "must be considered," the senators say.
The analysis was prepared by several mortgage insurance companies and community mortgage lenders which compared the performance of 17 million loans during the 2003-2007 housing and mortgage boom. (A copy was provided to National Mortgage News.)
Using CoreLogic loan data, they identified eight standards that should shape the QRM definition, including: full documentation of borrower income and assets; total debt to income ratio of 45% or less; and mortgage insurance for loans when the combined LTV is greater than 80%.
The analysis also shows that negative amortization loans, interest-only loans and ARMs that adjust before the seventh year should not be classified as qualified mortgages.
"It is important that this [QRM] definition be drawn broadly enough to support the recovery of the housing market, while remaining rooted in empirically sound underwriting and product standards that will incent lenders to originate prudently underwritten loans and avoid increased costs to homebuyers associated with the risk retention requirements," according to the senators Nov. 8 letter.
This issue is gaining attention now because some in the industry expect regulators might issue a draft of the proposed QRM rule before Thanksgiving.
