Bigger than Fannie and Freddie: Defining Qualifying Residential Mortgages

A prominent feature of the Dodd-Frank Act is the risk-retention provision in Title IX (Subtitle D, § 941).  It requires banks that originate mortgages to retain 5 percent of the credit risk in their portfolios.  The risk-retention requirement was created in direct response to the oft-cited lending practice that contributed to the housing bubble where mortgage originators would sell off the securitized loans without retaining any of the credit risk.  A key exception to the provision concern “qualified residential mortgages” (QRM) and loans designated as QRMs are exempt from the risk-retention requirement.

Dodd-Frank does not define nor specify what constitutes a QRM and leaves it up to the federal banking agencies, SEC, HUD, and the FHFA to issue rules (no later than April 21, 2011) to define a QRM.  Some have noted that the forthcoming proposed rule defining a QRM has the potential to have a larger impact on the housing finance market than the Obama Administration’s proposals to wind down Fannie and Freddie.

However, there are some limits placed on the definition of a QRM.  Dodd-Frank, at a minimum, requires that final definition of a QRM is no broader than what is already defined as a “qualified mortgage” in Title XIV (Subtitle B).  The definition of “qualified mortgage” creates standards that conform to some of the basic terms of a conventional 30-year mortgage (no negative amortization, no deferred principal payment, verified income and assets, etc), but notably do not specify LTV ratios or downpayment requirements (the forthcoming proposed rules will likely clarify these requirements).

More extensive discussion Dodd-Frank’s reforms to housing finance and the forthcoming proposed rules required by Title IX and XIV can be found here and here.

James Nguyen, Bigger than Fannie and Freddie: Defining Qualifying Residential Mortgages, Berkeley Bus. L.J. Network (February 16, 2011),