The Mortgage Bankers Association (MBA) reacted quickly to the publication yesterday of proposed rules governing Qualified Residential Mortgages (QRMs), the mortgages which will be exempt from the risk retention requirement of the Dodd-Frank Act.

In a statement released by MBA yesterday afternoon, President and CEO John A. Courson said that it would take time for the Association to fully evaluate the complexity of the hundreds of pages of regulations, but its first reaction was a "profound concern" about its impact on residential mortgage financing and "the nation's economy today and for generations to come."   

Courson cited the "rigid and highly prescriptive nature of the proposed rule," because such a narrow definition of the risk retention exemption would limit mortgage opportunities for qualified borrowers more than it would reduce the number of problems loans.  If enacted as proposed, Courson said, it would also reduce any role for independent mortgage banks and community lenders which, despite long histories as safe lenders may lack the balance sheets or capital to hold loans or reserve against risk.  

The regulations require specific underwriting standards including maximum front-end and back-end debt-to-income rations of 28 percent and 36 percent respectively, a loan-to-value ratio of 80 percent for purchase mortgages and 75 percent for refinances and credit restrictions including an absence of 60-day delinquencies for a two year period prior to the loan. MBA said that, while these factors can be accurate predictors of loan performance, they should not each be considered in isolation and the rule should allow for flexibility in interpreting each of the component parts.

The exemption for loans sold to Fannie Mae and Freddie Mac will help to ensure liquidity in the market, however MBA says it will do little to shrink the government's footprint in the housing finance system and could slow the return of the private secondary mortgage market.

The Association also takes issue with the inclusion of mortgage servicing standards in the proposed regulation saying that it should be the subject of a separate discussion and rulemaking.

Courson said that the association was pleased to see risk retention applied to all asset-backed securities including those secured by automobiles and commercial business loans and that each has been provided multiple options in the allocation of retained risk.  The statement specifically mentions the 5 percent vertical slice applied to commercial mortgage-back securities (CMBS,) but Courson goes on to say that given the complex provisions of the rule and its impact on the CMBS market the Association plans to seek clarification of the rule on commercial loans that will be eligible for a reduction in the 5 percent retained risk to ensure that terminology and eligibility requirements are consistent with industry norms and practices.