RPC Reg Spotlight May 10, 2011

 

Regulatory Action in the Spotlight:

 

Federal Deposit Insurance Corporation’s (FDIC) proposed rule on

Qualified Residential Mortgages (QRM)

 

Adverse Effects:

 

  • Potentially impacts the ability of qualified borrowers to purchase a home.
  • Requires 20% down payment.
  • Tightens capital which could be available for lending.

 

Response of the Obama Administration:

 

The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), passed last summer, requires banks and other firms that issue mortgage-backed securities to keep a five percent piece of the loans that they bundle and sell as securities.  On March 29, 2011, in a joint release from the Treasury Department, Federal Reserve System, FDIC, SEC, FHFA, and HUD, under Section 941 of Dodd-Frank, a proposed rule governing credit risk retention was released (76 Fed. Reg. 24090),to identify a Qualified Residential Mortgage.  Mortgages in these categories will not be subject to the new rules calling for companies to retain five percent of any originated credit.

 

In order to obtain this new “gold standard” in the mortgage industry, home buyers would have to produce at least a 20 percent down payment, have full documentation of income and assets, and meet stringent debt-to-income standards. Any borrower who has been 60 days delinquent on any loan, including car and credit card loans, within the last two years would be disqualified.  Refinance loans could not exceed 75 percent of the property's value, and that percentage would be reduced to 70 percent if the borrower was able to take out cash from the refinance deal.

 

Impact on the United States:

 

According to data from the National Association of Realtors’ 2010 Home Buyer and Seller Profile, “The median downpayment of all home buyers was 8 percent, ranging from 4 percent for first-time buyers to 14 percent for repeat buyers.”  In a March 30, 2011 National Association of Homebuilders media teleconference, Barry Rutenberg, First Vice Chairman of the association voiced his concern on the proposed rule stating, “Requiring a high down payment would disproportionately harm first-time home buyers, who have limited wealth and on average account for 40 percent of home-buying activity. It would take an average family 12 years to scrape together a 20 percent down payment. Borrowers who can’t afford to put 20 percent down on a home and who are unable to obtain FHA financing will be expected to pay a premium of two percentage points for a loan in the private market to offset the increased risk to lenders, according to NAHB economists. This would disqualify about 5 million potential home buyers, resulting in 250,000 fewer home sales and 50,000 fewer new homes being built per year.”

 

Furthermore, mortgages originated under the FHA program would be exempt from the QRM rule.  In 2009, FHA guaranteed nearly 37 percent of all mortgage originations, up from just three percent in 2007. Having the government play such a dominant role in the housing market places the American taxpayer at risk and crowds out private capital.

 

In Closing:

 

This proposed rule contains extensive additional provisions governing permissible methods for retaining required risk, treatment of government-sponsored entities and additional proposed exemptions for other types of securitization including an exemption for federally-insured or guaranteed residential, multifamily and health care mortgage loan assets.   Comments regarding this proposed rule must be received by June 10, 2011.

 

Relevant Congressional Action:

 

 

Chairman Scott Garrett’s Capital Markets and Government Sponsored Enterprises Subcommittee held hearings on April 14, 2011, to evaluate the proposed risk retention rules.  A number of Members of Congress have expressed concern that the proposed QRM rule is inconsistent with legislative intent.