Qualified Residential Mortgage

Dodd-Frank, Section 941, imposes credit risk retention requirements “under which securitizes, and in certain circumstances, originators of asset-backed securities must retain not less that 5 percent of the credit risk for any asset unless the asset is a qualified resident mortgage.” Dodd-Frank provides a “safe harbor” provision from risk retention requirement for “qualified residential mortgages.” On April 29, 2011, proposed risk retention requirements (Federal Register) establish underwriting standards which, including a maximum front-end and back-end borrower debt-to-income ratios of 28 percent and 36 percent, respectively. A maximum loan-to-value (LTV) ratio of 80 percent for home purchase mortgages and required 20 percent mortgage down payment.

In her last speech as FDIC chair, Shelia Bair expressed regret over the qualified residential mortgage (QRM) provision. She warned that “everyone, it seems, believes that their mortgage should receive QRM status,” she continued “this small extra cost is the price we must pay in the short term to put a little equity behind these mortgages, to ensure that incentives are properly aligned, and to avoid a costly repeat of the mortgage crisis in the future.”

In a letter to Federal regulators, a diverse groups of financial and consumer trade associations requested an extended of the comment period citing that QRM “would have an enormous impact on the availability and cost of mortgage credit and the housing market for years to come.” In a critique of QRM, for example, Ellen Seidman, former Director of the Office of Thrift Supervision, writes that proposed QRM rulemaking could “Crimp the American Dream” of homeownership. In response, “to allow interested persons more time to analyze the issue and prepare their comments,” the Agencies extended the comment period to August 1, 2011.

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