In a statement filed with the House Capital Markets Subcommittee, the American Bankers Association expressed grave concerns over the risk retention regulations proposed by the SEC and banking agencies to implement Section 941 of Dodd-Frank. The group said that the proposed qualified residential mortgage exemption from the risk retention mandate is very narrow and many high-quality loans posing little risk will end up being excluded. This will inevitably mean that fewer borrowers will qualify for loans to purchase or refinance a home.
While endorsing Dodd-Frank's goal of ensuring that participants in a mortgage securitization transaction have skin in the
game sufficient to create incentives for originators to assure proper underwriting and incentives to control default risk for participants beyond the origination stage, the ABA also noted the need for a vibrant and robust qualified residential mortgage exemption to ensure the stability and recovery of the mortgage market. Thus, the ABA strongly believes that creating a narrow definition of QRM is an inappropriate method for achieving the desired underwriting reforms intended by Dodd-Frank.
There have already been dramatic changes to the regulations governing mortgages, observed the ABA, with the result that mortgage loans with lower risk characteristics, which include most mortgage loans being made by community banks today, should be exempted from the risk retention requirements regardless of whether sold to Fannie Mae and Freddie Mac or to
private securitizers.
Under the proposal, for the loan to qualify for the risk retention exemption, borrowers must make at least a 20 percent down
payment and at least 25 percent if the mortgage is to be a refinance (and 30 percent if it is a cash-out refinance). While acknowledging that loans with lower loan-to-value (LTV) ratios are likely to have lower default rates, and that this should be one of a number of characteristics to be considered, the ABA emphasized that it should not be the only characteristic for eligibility as a qualified residential mortgage, and it should not be considered in isolation. Setting the QRM cutoff at a
specific LTV without regard to other loan characteristics or features, including credit enhancements such as private mortgage insurance, will lead to an unnecessary restriction of credit. To illustrate the severity of the proposal, even with private mortgage insurance, loans with less than 20 percent down will not qualify for the QRM.