Risk Retention Rule Likely to be a Victory for Banks
One of the first proposed rulemakings to come off the back of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), and certainly one of the most hotly contested, was the Risk Retention/Qualified Residential Mortgage (QRM) rule. Originally published in 2011, the proposed rule was supposed to establish a gold standard for mortgages, know as the QRM, to be sold into securities. As originally conceived, lenders who originated mortgages that did not fall within the QRM standard would be required to hold five percent of the loan amount for the life of the loan to cover any costs associated with default.
Industry groups, consumer advocates, and even members of Congress quickly teamed up to combat the proposed rule. Opponents of the rule argued that its 20 percent downpayment requirement to meet the QRM threshold would exclude the vast majority of homebuyers and scare private capital away from the housing market. After three years of lobbying, research and deliberation, it appears that regulators are preparing to release the final rule next week.
The Office of the Comptroller of the Currency (OCC), the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), Securities and Exchange Commission (SEC), Federal Housing Finance Agency (FHFA) and the Department of Housing and Urban Development (HUD) are said to have devised a much looser version of the original rule, with the QRM largely mirroring the Consumer Financial Protection Bureau’s (CFPB) Ability to Repay/Qualified Mortgage (QM) standard. The downpayment requirement has been removed all together, and has been replaced by a 43 percent debt-to-income standard. It is also expected that there will be a large exemption for the majority of mortgage lenders and investors for the five percent risk retention requirement.
Aside from the QM rule, the QRM rule is arguably the most significant rule to come out of the Dodd-Frank Act with respect to mortgage lending. Private mortgage investors have been waiting on the sidelines for the release of this rule to ensure that when they do begin buying mortgage backed securities (MBS) again that they are compliant with the new regulatory regime and maintain limited liability. Until now, Fannie Mae, Freddie Mac and the Federal Housing Administration (FHA) have dominated the mortgage buying and guaranteeing space. However, the release of the QRM could finally mean the return of private capital to the housing market.