Monday, March 28, 2011

Senate Authors of Qualified Residential Mortgage Carve Out from Dodd-Frank Risk Retention Provisions Clarify Legislative Intent

With the SEC and the federal banking agencies set to consider risk retention rules under Dodd-Frank, the Senate authors of the qualified residential mortgage carve out have written to the Commission to clarify the legislative intent of the carve out, which is codified in Section 941. The Senators said that, under Section 941, the SEC and the federal banking agencies are directed to define qualified residential mortgage by taking into consideration underwriting and product features that historical loan performance data indicate result in a lower risk of default. Dodd-Frank provides a baseline risk retention amount of five percent of credit risk for securitized assets, but carves out qualified residential mortgages.

In their letter to the SEC, Senators Mary Landrieu (D-LA), Johnny Isakson (R-GA) and Kay Hagan (D-NC) said that any effort to impose a high down payment requirement for any mortgage to meet the qualified residential mortgage exemption standard would be inconsistent with legislative intent. The Senators assured the SEC that, while there was discussion on whether the qualified residential mortgage should have a minimum down payment in negotiations during the drafting of the provision, they intentionally omitted such a requirement.

According to the Senators, the purpose of the qualified residential mortgage exemption is to support a housing recovery by creating a robust underwriting framework that will attract private capital to support responsible lending and borrowing. In developing the QRM framework, the Senators recognized the importance of establishing a framework that would allow creditworthy first-time homebuyers to have access to the benefits of loans meeting the QRM standard. They also recognized that homeowners in the hardest hit housing markets have lost extraordinary amounts of equity and that a high down payment is out of reach for many of them.

A qualified residential mortgage with a high down payment requirement would force them to postpone buying or refinancing a home for years, or to take on mortgages at much higher interest rates. Consequently, the QRM framework set forth in Dodd-Frank specifically contemplates the inclusion of low-down payment loans, provided they have mortgage insurance or other forms of credit enhancement, to the extent such insurance or credit enhancement reduces the risk of default.

The Senators strongly urged the SEC and the banking agencies to adopt a QRM framework that follows the statutory framework and supports a housing recovery by ensuring that all financially responsible families will have access to the lower interest rates and borrower protections afforded by the qualified residential mortgage carve out.

The risk retention rules are challenging enough to write without the inclusion of extraneous issues, emphasized the Senators, and the qualified residential mortgage provisions of Section 941 are clear in their intent and provide regulators with an explicit framework to follow. The Senators also envision lenders, investors, housing groups and consumers having ample time to provide extensive comment on the proposals. The Senators intend to review the proposed regulations for risk retention and qualified residential mortgages.