After a three-year rulemaking process, the U.S. Federal Reserve is poised to adopt the final version of a new rule for retention of credit risk in securitizations. The rule was mandated by Congress after the global financial meltdown.
Under the 2010 Dodd-Frank law, Congress required banks to retain 5% of the credit risk on loans when they sell them to investors through mortgage securitization. Seeking to avoid excessive restrictions on creditworthy borrowers, legislators also mandated an exemption for “qualified residential mortgages.”
In 2011, regulators proposed a QRM rule that would have exempted only safe loans, with a hefty down payment and stringent debt-to-income ratios, from the risk-retention requirement. After two years of lobbying from the banking industry and affordable housing advocates, the rule was reintroduced last year.
The Fed will meet next week to adopt that new rule, Reuters reports, noting that it will address “a crucial issue that helped set off the 2007-09 credit crisis.”
In response to the 2011 rule, a coalition of 52 groups including the American Bankers Association argued that “unnecessarily high down-payment requirements under QRM would make a near-term housing recovery almost impossible … [it] thwarts the will of Congress, impedes the economic recovery and unnecessarily burdens American homebuyers.”
The new rule, among other things, defines QRMs as having the same meaning as the term “qualified mortgages” as defined by the Consumer Financial Protection Bureau.
“This approach achieves the twin objectives of protecting the marketplace while ensuring borrowers have access to safe mortgages,” the Coalition for a Sensible Housing Policy said in comments on the rule. “Investors will remain confident they can rely on the quality of mortgages underlying securitizations and creditworthy borrowers will be able to obtain access to conventional financing for safe, sustainable mortgages.”
The underwriting and loan product limitations that are mandated for QM loans “effectively limit the risk of default without excluding large numbers of creditworthy borrowers,” the coalition added.