MBA Comments On Dodd-Frank ‘Qualified Mortgage’ Definition

On Nov. 9, the Mortgage Bankers Association sent a letter to federal financial regulators commenting on what the regulators should consider when defining a “qualified residential mortgage” for purposes of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

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The definition is critical because it will determine what types of home mortgages are covered by the new law’s risk-retention requirements. The Dodd-Frank Act requires securitizers to retain a portion of the credit risk of assets they securitize unless, in the case of home loans, they meet the definition of a qualified residential mortgage (QRM).

The letter was sent to the following agencies: the Department of the Treasury; the Department of Housing and Urban Development (HUD); the Securities and Exchange Commission (SEC); the Federal Housing Finance Agency (FHFA); the Federal Reserve Board; the Comptroller of the Currency; the Federal Deposit Insurance Corporation (FDIC); and the Office of Thrift Supervision (OTS).

MBA’s letter noted, “The potential impact on the availability of credit stemming from the QRM risk-retention exemption cannot be overestimated.” It went on to underscore: “Few loans to ordinary customers are likely to be made outside the QRM construct; the loans that are made will be costlier and likely to be made only to more affluent customers.”

MBA cautioned, “Where possible, regulators should avoid establishing static, prescriptive criteria that do not allow lenders the ability to consider compensating factors in meeting the financing needs of qualified borrowers.”

MBA underscored the danger of potential adverse selection for the Federal Housing Administration (FHA) single-family program because FHA loans are exempt from risk-retention requirements. The letter stated, “Unless the QRM definition is calibrated properly, there is a danger that the FHA program could be overutilized.”

In an attachment to the MBA letter, the association supplied recommendations for types of loan products and features that should be both included and excluded from the QRM definition. Product terms the MBA recommended not be included are: balloon payments; mortgage terms exceeding 30 years; and negative amortization. MBA also suggested that the definition not include adjustablerate mortgages that adjust in less than three years after origination.

MBA recommended that the QRM definition mandate that loans be fully documented and that the accompanying re-quirements for verification be defined in the rule, as well as the term “fully documented.”

The association recommended that QRM loans require credit enhancement, such as mortgage insurance, for mortgages with a loan-to-value (LTV) ratio greater than 80 percent. MBA also said that the QRM definition could “encompass interest-only (IO) mortgages if other requirements are put in place.” Then it went on to elaborate that “Interest-only mortgages should be permitted so long as they are underwritten at the fully indexed/fully amortizing payment and are originated subject to other requirements, including requirements for documentation and verification.” The group said mandatory counseling and/or escrow account components could be considered as additional safeguards for certain categories of homeowners using IO products.