June 10, 2011 (Chris Moore)
Regulators from the six federal agencies who were tasked with crafting the proposal for the risk retention rules for mortgages required under last year’s Dodd-Frank Finance Reform Bill have extended the deadline for the public comment period until August 1, 2011.
Although there are many parts to the risk retention proposal, the one part that has received the most attention concerns the rules regarding what defines a Qualified Residential Mortgage (QRM).
A QRM is a home loan that would exempt a mortgage lender from a 5 percent retention in each home loan that it originates and is packaged for securitization. If all the loan qualifications meet or exceed the requirements of a QRM, the bank would no longer be required to retain the 5 percent share of the loan and would have no future risk if the borrower should default.
Under the current proposal, a QRM loan would require mortgage lenders to retain the five percent stake in the mortgage loan if the borrower puts a down payment of less than a 20 percent (loan-to-value). The purpose of having the lenders retain a “risk” in the loan is to discourage them from making the same type of risky loans that led to the current housing crisis.
By virtue of being a higher risk, borrowers who do not meet QRM requirements are then expected to be charged higher fees and rates. Housing advocates predict that if the current QRM proposal were to become law, approximately one-third of potential homebuyers would be immediately taken off of the housing market.
But there is much more to the risk retention rules than the QRM proposal that could be just as damaging. The list below details additional rules that are being proposed that some housing experts believe could extend the current housing crisis for years:
– A QRM must be secured by a first lien mortgage only, cannot exceed 30 years and must be a one-to-four family property.
– The proposed rule prohibits the use of a junior lien in conjunction with a QRM to purchase home.
– Credit history requirement – A mortgage loan could qualify as a QRM only if the borrower was not currently 30 or more days past due, in whole or in part, on any debt obligation, and the borrower had not been 60 or more days past due, in whole or in part, on any debt obligation within the preceding 24 months. Further, a borrower must not have, within the preceding 36 months, been a debtor in a bankruptcy proceeding, had property repossessed or foreclosed upon, engaged in a short sale or deed-in-lieu of foreclosure, or been subject to a Federal or State judgment for collection of any unpaid debt.
– The proposed rules would prohibit QRMs from having, among other features, payment terms that allow interest-only payments or negative amortization. Borrowers would be prohibited from deferring interest or repayment of principal. “Balloon” payment loans would also be prohibited.
– Both fixed rate and adjustable rate mortgages (ARM)may qualify as a QRM, however ARMs interest rates would be restricted to no more than a two percent increase in any twelve month period and six percent for the life of the loan.
– Creditors who offer a loan with a prepayment penalty would also have to offer a loan without a prepayment penalty.
– Points and fees for a QRM may not exceed three percent of the total loan amount.
– 20 percent down payment requirement. There are various rules based upon the appraised value of the home…too many to list, but they can found on page 80.
– Debt ratio cannot exceed 28 percent for the house payment and 36 percent for total obligations.
– A QRM could not be assumable by any person who was not a borrower under the original mortgage transaction.
If you wish to comment on the proposed risk retention rules you can do so on any of the following websites: Office of the Comptroller of the Currency, the Federal Reserve, the Federal Deposit Insurance Corporation, the U.S. Securities and Exchange Commission, the Federal Housing Finance Agency, and the Department of Housing and Urban Development.
You can read the proposal in its entirety on the Federal Reserve’s website.
Tags: risk retention proposal, QRM, Dodd-Frank, home loans, mortgage lenders, five percent retention, qualified residential mortgages