Dodd-Frank Act to require that banks retain small percentage of risk.  Exemption considered for loans which meet ORM standards

A major debate underway in our nation’s capitol hinges on how federal regulators choose to define a “Qualified Residential Mortgage” (QRM).  Opposing sides agree on one thing: this decision could fundamentally change America’s real estate industry. After researching a key component of the debate, FICO has found a significant flaw in the draft regulation.  

The Dodd-Frank Act calls for mortgage issuers to retain a small percentage of the risk in the home loans they securitize and sell to investors. This risk retention is likely to raise costs for banks, and consequently, for borrowers—because banks must hold more capital in reserve.  Analysts at J.P. Morgan Securities have reportedly estimated that mortgage rates could rise by as much as three percentage points for loans that are subject to risk-retention.

Nevertheless the Act allows an exemption for high-quality loans that meet QRM standards. In other words, banks that securitize loans won’t need to retain any part of the risk of QRM-compliant loans. Congress left to regulators the work of defining what constitutes a QRM-compliant loan.  So regulators from six Federal agencies recently proposed QRM standards as part of a larger risk retention rule and invited public comment by August 1.  To read the full storty click on the link below.

Source:  FICO Banking Analytics Blog