Federal regulators on Tuesday approved a final, softened version of the Qualified Residential Mortgage (QRM) rule that requires lenders to retain a 5% stake in mortgage loans that are sold to investors, thus completing a key unfinished piece of the 2010 Dodd-Frank financial overhaul law.
When it was first introduced in 2011, the proposed QRM rule applied only to loans where borrowers made less than a 20% downpayment. However, under the final rule approved by the Federal Deposit Insurance Corp., Office of the Comptroller of the Currency and Federal Housing Finance Agency (FHFA), that requirement has been dropped – due primarily to lenders successfully arguing that it would hamper lending to lower-income or underserved borrowers.
As per the approved rule, lenders will only have to document a borrower's ability to repay and ensure they have a debt-to-income ratio of below 43%.
In addition, requiring lenders to keep some ‘skin in the game,’ the new rule restricts loans with certain features such as balloon payments or repayment terms of longer than 30 years.
The new rule goes into effect in fall 2015. After four years, it will be reviewed to determine its impact on the housing market – and then every five years after that.
‘This is an important milestone on the road to completing the rules implementing the Dodd-Frank Act,’ said Thomas J. Curry, comptroller of the currency, in a statement. ‘This final rule will provide more certainty in the securitization markets, which will have a positive effect on our economy.’
The new rule is aligned with the Consumer Financial Protection Bureau's qualified mortgage, or QM, rule designed to protect borrowers.
Loans guaranteed by Fannie Mae and Freddie Mac will automatically be exempt from the risk-retention requirements, as long as they remain in conservatorship.
In a statement, David H. Stevens, president and CEO of the Mortgage Bankers Association (MBA), said the revisions to the rule mean it is less likely to ‘exacerbate the tight credit environment currently facing many borrowers.’
‘We are particularly pleased that regulators abandoned the concept of a restrictive down payment requirement that would have hurt many potential low to moderate and first-time home buyers,’ Stevens said. ‘But it is important to realize that this rule will not have a significant impact in making mortgage credit more available, as there remain structural and market barriers that need to be addressed for the private-label securities market to fully return.’
‘The rule also reflects significant changes from the initial proposed rule, which would have been highly detrimental to the commercial and multifamily real estate markets, with the Premium Capture Cash Reserve account being one element in particular that MBA strongly opposed and that has been removed,’ Stevens added. ‘In addition, the final rule was responsive to MBA's position of providing greater flexibility for the permitted forms of risk retention.’
‘I would note that linking the QRM to the QM definition only reinforces the need to address the so-called 'QM patch' which affords QM status to any loan that can be sold to Fannie Mae or Freddie Mac,’ Stevens continued. ‘Given the ongoing debate over GSE reform, policymakers need to ensure the QM definitionÂ can stand alone, independent of the future of the GSEs.Â We look forward to tomorrow's final action by the Federal Reserve and U.S. Securities and Exchange Commission to approve the final QRM rule.’
Curry said the new rule ‘is an important milestone on the road to completing the rules implementing the Dodd-Frank Act.’
‘The securitization markets play a vital role in financing the needs of American consumers, from autos to housing, but securitizations can also provide incentives for lax underwriting if originators believe they can simply offload weak credits to investors with no further responsibility for the loans,’ Curry said. ‘The rule â�¦ will require lenders to retain some of the risk for the loans that go into securitized pools except for home mortgages that meet the standards necessary under the qualified residential mortgage, or QRM, exception.’
Curry added that he is pleased that the rule will be reviewed four years after it goes into effect.
‘By then, we should have enough experience with the standards to know whether they strike the right balance between long-term financial stability and the home-financing needs of American families, and we can adjust them if necessary," he said. ‘I believe this final rule will provide more certainty in the securitization markets, which will have a positive effect on our economy.’
Mel Watt, director for the FHFA, said that ‘finalizing this rule represents a major step forward to providing greater certainty to the housing finance market and paves the way for increased participation by the private sector.’
‘Aligning the Qualified Residential Mortgage standard with the existing Qualified Mortgage definition also means more clarity for lenders and encourages safe and sound lending to creditworthy borrowers,’ Watt added. ‘Lenders have wanted and needed to know what the new rules of the road are and this rule defines them.’