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INDUSTRY WEIGHS IN ON REGULATORS' REVISED QRM RULE Six federal agencies issued a notice revising their proposed Qualified Residential Mortgage (QRM) rule that would require lenders to retain risk when selling mortgage-backed securities (MBS). The FDIC, HUD, Federal Housing Finance Agency (FHFA), Office of the Comptroller of the Currency, Federal Reserve, and Securities and Exchange Commission (SEC) jointly released their proposed revision in late August. Officials said adjustments were made in consideration of the industry's response to the original proposal issued in 2011. Under the new proposal, the 36 percent income threshold that characterized regulators' initial idea has been raised to 43 percent. That means lenders are required to keep a stake in the loans they sell to investors if the borrower is spending more than 43 percent of their income on the mortgage. The revised rule also eliminates the initial 20 percent down payment requirement for exemption, opening up lending for low-income borrowers. The agencies also made adjustments to bring the QRM proposal more in line with the Qualified Mortgage (QM) rule handed down by the Consumer Financial Protection Bureau (CFPB) earlier this year. The alignment opens up the scope of QRM eligibility, which was originally "limited to closed-end, first-lien mortgages used to purchase or refinance a one-to-four family property, at least one unit of which is the principal dwelling of the borrower." "[T]he agencies seek to ensure that relevant definitions in the proposed rule and in the CFPB's rules on and related to QM are harmonized to reduce compliance burden and complexity, and the potential for conflicting definitions and interpretations where the proposed rule and the QM standard intersect," regulators' 500-page revised proposal reads. Much of the original proposal's content has been kept, including a portion of the rule that would exempt commercial MBS (among other 42 types of non-mortgage securities). The rule also still recognizes "the full guarantee on payments of principal and interest provided by Fannie Mae and Freddie Mac for their residential mortgage-backed securities as meeting the risk retention requirements" for as long as the enterprises are in conservatorship. Regulators are also requesting comment until October 30 on an alternative definition of QRM that would include alternative underwriting standards, including an option that would create a 30 percent down payment requirement for the QRM definition. "While the second proposal is an improvement to the first, we believe it will still have a negative downstream effect on credit unions," said Carrie Hunt, general counsel and SVP of government affairs for the National Association of Federal Credit Unions (NAFCU). "As such, we will thoroughly study the proposal and work with the FHFA and the other agencies to provide relief for credit unions from the rule's effect on their mortgage lending." Though the proposed rule doesn't directly apply to credit unions, Hunt noted that "as participants in the mortgage market, credit unions will feel the effect of any final rule impacting that market." Criticism also came from within the regulatory coalition itself. In a dissenting statement, SEC Commissioner Daniel Gallagher said the lowering of standards could result in a repeat of the bad practices that led to the crash. He also noted that aligning QRM standards with the QM definition—which he called "deeply flawed"—abdicates the agencies' responsibility to the CFPB. "The re-proposed risk retention rules, if adopted, will ensure that the vast majority of mortgages in the United States are insured or owned by the government, will introduce another flawed government imprimatur of creditworthiness into the markets, and will disincentivize proper risk management and due diligence in the mortgage markets," Gallagher said. "I cannot in good conscience support today's re-proposal, and I respectfully but vigorously dissent." He was joined in his dissent by SEC Commissioner Michael Piwowar, who argued that the agencies did not conduct necessary economic analyses when revising the rule and said it does not adequately consider alternatives to risk retention requirements. Several analysts also shared insight into how the revisions might benefit or impede progress in the mortgage market. Fitch Ratings said it believes syncing the QRM and QM proposals will make the transition to the new rules easier for originators and lead to reduced costs. "Most of the existing prime jumbo originators have been implementing technology and internal methodologies to meet the requirements of QM. However, the uncertainty over QRM had posed some logistical challenges," Fitch said. According to the ratings agency, adopting a QRM standard that mirrors the QM definition would also trigger more activity for the jumbo origination and securitization market. A report from Keefe, Bruyette, & Woods (KBW) noted that mortgage insurers, in particular, should find great relief from the revised QRM proposal. "The originally proposed 20 percent down payment requirement could have reduced the volume of MI [mortgage insurance] business once the GSEs were no longer in conservatorship (and assuming they had a capital requirement of below 5 percent at that time)," KBW analysts stated in the company's report. While the recent proposal received praise for being less restrictive than the original proposal and for aligning with the QM rule, Capital Economics highlighted two areas of concern. Property economist Paul Diggle noted the inclusion of an even stricter 30 percent down payment as an alternative rule still leaves uncertainty about what the final rule might look like. Though, he did add that the higher down payment option is unlikely to make it into the final QRM definition since "industry feedback will ensure that regulators quickly drop this alternative approach." Of even greater concern, according to Capital Economics, is QM and QRM aren't much help when it comes to the long-term goal of reducing the presence of the GSEs in the mortgage market. "For lenders, the path of least resistance will be to continue issuing conforming mortgages which are bought or guaranteed by Fannie Mae and Freddie Mac, which automatically count as QMs and will now meet the QRM standard," Diggle wrote. "In the long-run, that's going to make it harder to reduce the industry's reliance on Fannie and Freddie and encourage the entry of private capital."

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