What is QRM and why should we care?

Lately we have been talking about some of the major changes in our business as they pertain to the new Fed rule on comp and the implementation of Dodd–Frank this summer.  What some are NOT talking about is the risk- retention aspect of the Dodd-Frank bill.

The Dodd-Frank financial-overhaul law that passed last summer includes a stipulation that requires banks to keep a 5% holdback of the loans that they securitize; Congress wanted them to have “skin in the game.”

Prompted by concerns that these new rules might raise costs for even “plain vanilla” loans that weren’t at the root of the mortgage bust, Congress created an exemption called “qualified residential mortgage.”  Anything that regulators deem to be a “qualified residential mortgage,” or QRM, would be exempt from these rules.

A loan that does not qualify as a QRM would, by all accounts, have a much higher interest rate and down payment associated with it.  Some analysts predict that non-QRM loan interest rates could jump 2-3 points immediately following the implementation of the law.

Dodd-Frank specifically identifies loans guaranteed or originated by FHA, VA, and USDA as qualified for exemption but leaves other products, including loans written by Fannie and Freddie, up to federal regulators to determine.

Some of the standards that could be required for a QRM loan:

  • Debt-to-income ratios within guidelines
  • Verifying income on all borrowers
  • Loan to Value in transaction
  • Types of loans
  • Fully amortized (no interest-only loans)

As of this week the Federal Deposit Insurance Corporation (FDIC) has scheduled a meeting of its Board of Directors for next Tuesday (March 29) to vote on the issue.  A draft of the proposed rule will be made available to the public at that time.

FDIC will move first on the rule, and we expect that the other agencies–the OCC, the Fed, HUD, the SEC, and the FHFA–will be approving the rule in the days following the FDIC’s action.  Once the agencies sign off on the rule, it will be published in the Federal Register; and a period of public comment (typically 60 days) will begin.

Stay tuned for now . . .

John McClellan

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