The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) became law on July 21, 2010. Section 941 of the Dodd-Frank Act requires financial institutions that securitize mortgages loans to retain at least 5 percent of the credit risk.
The Dodd-Frank Act, however, exempts from the risk-retention requirement securities backed exclusively by “qualified residential mortgages,” or QRMs—mortgages with underwriting and product features that historical loan performance data indicate result in a lower risk of default. By exempting QRMs from the risk-retention requirement, the cost of securitizing these mortgages is reduced, thus providing a market incentive for the wide origination of responsible loans.
Highlights of the Proposed QRM Standards
- The proposed QRM rule would require an 80% LTV, which requires a 20% down payment.
- The proposed rule would also limit the mortgage payment to 28% of gross income and limit all debt to 36%.
- No credit score requirement is included, but a mortgage loan would qualify as a QRM only if the borrower is not currently 30 or more days past due on any debt obligation.
- Borrowers could not have been 60 or more days past due on any debt obligation within the preceding 24 months.
- Borrowers could not have, within the preceding 36 months, been through bankruptcy, been foreclosed on, engaged in a short sale or deed-in-lieu of foreclosure, or been subject to a Federal or State judgment for collection of any unpaid debt.
The QRM definition is of extraordinary importance for three reasons:
- It will determine the types of mortgages that will be generally available for borrowers for the foreseeable future.
- It will serve as a precursor for what the successor(s) to the current GSEs (Fannie Mae and Freddie Mac) are likely to be allowed to securitize.
- Finally, the QRM proposal will telegraph the administration’s intentions for FHA. A narrow QRM will require severe tightening of FHA to prevent huge increases in FHA’s already robust market share.