On QRMs and Dismissals

by. Henry Meier

In honor of the kids going back to school in the next couple of weeks (this is the time of year that I realize the summer break is way too long), I’m going to start this morning’s blog with a quiz:

Is a QRM a(n):

a) autoimmune deficiency disease?

b) something you should avoid getting when you go away to college?

c) a penalty for failing to comply with basic underwriting standards? or

d) a qualified residential mortgage under the Dodd-Frank Act?

If you said d) you are correct and it is actually a good thing, at least based on my initial look at proposed regulations published jointly yesterday by federal regulators not including the NCUA.  In an attempt to ensure that corporations that create mortgage-backed securities have “skin in the game,” Dodd-Frank generally requires issuers of these securities to hold 5% of their investment in portfolio.  The statute made an exception for bonds comprised of qualified residential mortgages (QRMs).  The regulators were given responsibility for determining when a mortgage would qualify as a QRM with guidance that their definition of a QRM could not be more expansive than the CFPB’s definition of a qualified mortgage (QM).  The first proposal scared the heck out of the financial industry.  For instance, a mortgage would only qualify as a QRM if the borrower put 20% of the purchase price down.  With its proposal yesterday, calmer heads prevailed.  With the caveat that the devil is always in the details with this stuff, yesterday’s rule provides that if a mortgage satisfies the CFPB’s definition of a QM, then it is also a QRM.

continue reading »