As published in Scotsman Guide's Residential Edition, July 2011.
At the beginning of May, much of New York City was outside celebrating a stretch of beautiful spring weather. In the Marriott Marquis hotel in Times Square, however, a more somber mood was present as mortgage bankers discussed the future of their industry at the annual Mortgage Bankers Association (MBA) National Secondary Market Conference.
One of the primary issues facing the industry is the dilemma of how to restructure the mortgage-securitization markets so investors will have more confidence in purchasing mortgage-backed securities. A large part of that confidence revolves around the definition of the qualified residential mortgage (QRM) and its estimated impact. Another major part involves trying to discern the effect of a reduced government role in the mortgage industry in the future.
Let’s look at each of these issues and what impact they may have on mortgage originators.
What’s a QRM?
The QRM can be broadly defined, as one conference speaker put it, as the “new private-label conforming loan.”
In other words, QRMs will be considered the gold standard of mortgage loans in that financial institutions will not be required to hold any capital against QRMs for secondary-market transactions. For non-QRMs, financial institutions will be required to hold 5 percent of capital in a “vertical” or “horizontal” structure, which would make non-QRMs much more expensive and less attractive for them. A vertical structure means the institution would hold 5 percent against each tranche, whereas horizontal means it would take a first-loss position of 5 percent.
The current proposed definition of a QRM is a loan with the following characteristics:
Owner-occupied, one to four units, fixed or adjustable rate
28 percent front-end/36 percent back-end debt-to-income ratio and greater than 80 percent loan to value (LTV) for purchase loans, 75 percent for refinances or 70 percent for cash-out refinances
No 60-day delinquencies in the past two years no bankruptcies, foreclosures or short sales in the past 36 months
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