In the wake of proposed risk retention rules by the SEC and federal banking regulators conditioning a qualified residential mortgage on a 20 percent down payment, Senator Kay Hagan (D-NC) stated that a rigid, across-the-board down payment requirement would unnecessarily prevent middle-class first-time home buyers from getting affordable mortgages. Senator Hagan is, along with Senators Mary Landrieu (D-LA) and Johnny Isakson (R-GA), the co-author of the qualified residential mortgage carve out codified in Section 941 of Dodd-Frank. While acknowledging that regulators showed some flexibility in the proposal, Senator Hagan said that she and her co-authors will work with them to ensure that the final rule allows qualified families to access safe and stable mortgages.
In a letter last month to the SEC and the banking agencies, 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.
They 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.