Qualified Mortgage, Qualified Residential Mortgage And Risk Retention

Under Title XIV of the Dodd Frank Act federal regulators must establish minimum underwriting standards for residential mortgage loans by 4/15/11 (excluding reverse mortgages and bridge loans of up to one year). This referred to as the Qualified Mortgage standard (QM). The requirements will define how a lender will support the consumer has a reasonable ability to repay the obligation. The QM description contains a safe harbor that defines ‘ability to repay’ and lists 9 very detailed components within the loan terms in order to earn the safe harbor. These 9 items require a lot more detail from the regulators before lenders will be able to classify loans as fitting the QM definition. QM is not to be confused with QRM under Title IX of Dodd Frank which required securitizers retain a minimum of five percent economic interest unless the assets meet certain underwriting standards for reduced credit risk. Although the term will not be defined more broadly than the QM, it may be less stringent and therefore, may not be the same. We will not know until the regulators speak. The MBA submitted a joint trade letter with American Land Title Association, Real Estate Association of America, Community Associations Institute, Community Mortgage Banking Project, Community Mortgage Lenders of America, Mortgage Bankers Association, Mortgage Insurance Companies of America, National Association of Home Builders, National Association of Real Estate Brokers, and National Association of Realtor, Center for Responsible Lending and Consumer Federal of America. The letter requests that the definition for the QRM is not “…an unduly narrow definition …because it could forestall the recovery of the housing market by making mortgage unavailable or unnecessarily expensive for many creditworthy borrowers.” The ABA sent a separate letter also expressing that the QRM exclusion should not be too narrowly defined in an effort to restrict loans from purchase by the GSE’s. They are stressing that GSE policy must be separated from the underwriting goals of risk retention. We will continue to watch how both of these definitions develop. There seem to be many publications that blur the lines between QM and QRM when the reality is they are two very distinctly different rules that risk managers will have to put in place.