The QRM Effect

Many might be wondering how the proposed Qualified Residential Mortgage (QRM) Rule will affect community Jerod11banks.  In the short term, we don’t expect much, if any, effect at all.  I know, I know, how can something we’ve heard so much complaining about have such little impact?  Well, it has to do with the rule’s target and some very friendly exemptions.

From a 10,000-foot view the QRM requirements are as follows:

  1. An entity will be required to retain at least 5 percent of the credit risk for any asset the entity transfers, sells or conveys to a third party by issuing an asset-backed security; and,
  2. Prohibits an entity from directly or indirectly hedging or otherwise transferring the credit risk that is required to be retained by the QRM rule.

On the surface the QRM rule targets/covers any residential mortgage loan used as collateral in connection with asset-backed securities.  I’m sure I just lost many of you so let’s over-simplify this:

  • First, the QRM rule will not apply to any portfolio or “in-house” residential mortgage loans.  Why?  Because 100% of the credit risk is already retained.  This means those banks who only make portfolio loans and/or do not sell any residential mortgage loans to investors are outside the scope of the QRM rule.  If so, congratulations, you may stop reading!
  • If you’re still reading it means your bank makes and sells residential mortgage loans to investors.  At this point there’s still good news due to a couple of friendly exemptions.  First, loans meeting Regulation Z’s Qualified Mortgage status will be exempt.  Second, residential mortgage loans such as Fannie Mae, Freddie Mac and similar government agencies will be exempt from the QRM rule, for now.  As you may know there is a political push to “wind down” Fannie Mae, Freddie Mac and similar government backed programs.  If that happens, the exemption will go away.

So what’s left?  Residential mortgage loans made and sold to private investors.  If you make these, then you need to be aware of and understand the proposed QRM risk retention rules.

Jerod Moyer

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