Risk Retention Guidelines Could Increase Reliance on FHA Loans

As part of the Dodd-Frank Wall Street Reform and Consumer Protection Act (DFA), regulators are required to establish a “Qualified Residential Mortgage” that will be exempt from risk retention requirements.

“The potential impact on the availability of credit stemming from the QRM risk retention exemption cannot be overestimated,” said the Mortgage Bankers Association in a letter.  “Few loans to ordinary customers are likely to be made outside the QRM construct; the loans that are made will be costlier and likely to be made only to more affluent customers.”

The association also expressed its concern that if the QRM definition is too narrow, it will greatly increase the utilization of Federal Housing Administration (HECM reverse mortgages) loans since it’s exempt from risk retention requirements.

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Data compiled by Source Media shows that FHA already has a 30% share of the mortgage market while most the remainder is dominated by the GSEs, namely Fannie Mae and Freddie Mac.  The MBA listed eight characteristics to be included in a regulatory definition of a QRM, that will not unnecessarily constraining the mortgage market.

“We must also remember that many of the loan products and characteristics under consideration to be restricted were, for many years, not problematic when underwritten prudently.”

Federal banking agencies as well as the Securities and Exchange Commission, Federal Housing Finance Agency and Department of Housing and Urban Development are working on qualified mortgage standards with a final rule due April 1.

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