All of the federal agencies responsible for determining which residential mortgage loans can be exempt from the retention of credit risk in securitizations are still thinking about it. As of the end of last month, the Securities and Exchange Commission, the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Federal Reserve Board, the Federal Housing Finance Agency (“FHFA”) and the Department of Housing and Urban Development (together, the “Agencies”) have announced that they hope to have more responses by the end of this year. It seems likely that these agencies will continue to define these exempt mortgages (referred to as “qualifying residential mortgages” or “QRMs”) in a manner that is fully aligned with the definition of “qualifying mortgage” (“QM”) in the Consumer Financial Protection. Bureau (“CFPB”) (which, interestingly, is not one of the agencies responsible for QRM / risk retention rules). If it were that simple, the Agencies probably would have done it already. Of course, CFPB’s definition of quality management has itself been a moving target.
In 2014, the Agencies issued a final rule, pursuant to the Dodd-Frank Act (the “Act”), requiring that an asset-backed securities (“ABS”) securitizer retain at least five percent of the risk of credit of the assets pledging the securities. Sponsors of securitizations that issue ABS interest must retain either a horizontal eligible residual interest, a vertical interest, or a combination of the two. The law and agency rule have established several exemptions from this requirement, including for securities secured exclusively by residential mortgages that qualify as QRM. Agencies have defined the QRM to be fully aligned with the CFPB definitions of QM. (QMs are deemed to comply with the CFPB repayment capacity rule.) Accordingly, any change made by the CFPB to the definition of QM automatically changes the definition of QRM.
The law requires that agencies, when defining QRMs, take into account “the characteristics of the underwriting and of the products which, according to historical data on loan performance, result in a lower risk of default”, including some. familiar factors (documentation and verification of income and assets, residual income standards or debt-to-income ratios and payment shock mitigation). The law also directs agencies to take into account the presence of “mortgage guarantee insurance or other types of insurance or credit enhancement obtained at the time of inception”, a factor that neither the law nor the CFPB do not address within the framework of the MQs. Ultimately, the Act expressly provides that the definition of QRM cannot be broader than the definition of a QM. As noted above, the agencies concluded that alignment between QRM and QM is necessary to protect investors, improve financial stability, preserve access to affordable credit, and facilitate compliance. Their credit risk retention rule came into effect for securitization transactions secured by residential mortgages in 2015 (and for other transactions in 2016).
The agencies are committed to periodically revising their definition of QRM, and they began this process in 2019 by soliciting input from the public. At that time, many commentators simply asked agencies to wait until the CFPB finalized its review of its quality management rule, which had been feverishly underway since quality management status for qualifying mortgages. of Fannie Mae and Freddie Mac was scheduled to expire in January 2021. The agencies then announced in June 2020 that they were extending their review period until June 20, 2021. Meanwhile, the CFPB agreed on a transition to a new definition of QM based largely on the annual percentage rate of a loan, which the CFPB has determined to be better predictive of default risk than underwriting characteristics, and far from QM categories depending on whether the loan is eligible for sale to Fannie Mae or Freddie Mac (the “GSEs”) or has a debt-to-income ratio not exceeding 43%.
At stake, among others, is the appropriate role of GSEs in the residential mortgage securities market. The previous QM category for GSE-eligible loans was a temporary post-financial crisis measure to ensure the availability of affordable mortgage credit as the economy recovers and private sector capital reappears. However, until 2019, the CFPB found that, contrary to its expectations, GSEs continued to play an “important and persistent” role in the mortgage market. One of the objectives of the FHFA at the time, in addition to strengthening the capital of the GSEs and withdrawing them from supervision, was to standardize the rules of the game, in particular through a QM standard without particular advantages. for GSEs. More recently, the FHFA (under former director Mark Calabria) imposed certain mortgage purchase limits to deal with the risk exposure of GSEs. These efforts appear designed to make way for a more robust private label securities market for residential mortgages.
Of course, since the 2020 elections, we have new leaders at CFPB and FHFA, as well as in several other Agencies. Experts expect the new administration to prioritize using GSEs to promote affordable and equitable housing goals, and may put a little less emphasis on ending guardianship. The FHFA and the Treasury Department may even agree to lift the recent GSE mortgage purchase limits. The “new” CFPB, for its part, said it was considering new rules on some aspects of its definition of quality management.
What does all of this mean for the future of QRM? As mentioned above, while agencies are likely starting from a position of continuous alignment between QRM and QM, agencies can wait to see what changes, if any, the CFPB makes to QM. Moreover, while the pricing of a loan (i.e. its annual percentage rate) was the primary factor used by the CFPB to measure default risk when it revised the QM, Law no. ‘expressly require that Agencies take the price of a loan into account when setting the QRM. Thus, despite a general desire for alignment, there is a mismatch between the QM based on CFPB prices on the one hand and the statutory factors of the Agencies for the QRM on the other.
Nonetheless, the public policy objectives underlying risk retention argue that only high credit quality assets should qualify for an exemption from this requirement. During the agencies’ latest QRM regulations, they tried to strike the right balance between not excluding creditworthy borrowers, preserving the right population of non-QRMs, and establishing transparent and verifiable limits. Agencies are likely to look at a lot of data on loan performance, the cost of risk retention, and the extent to which those costs are passed on to borrowers. Agencies certainly cannot ignore the prevailing market conditions – including the pandemic and its continuing effects on the economy in general, and housing in particular. Ultimately, there are significant and important justifications for the continued alignment of QRM with QM, notwithstanding the differences noted above.
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