QRM 20% Standard Could be Lowered

There seems to be some momentum building among US regulators to revise the “20% Down Payment Rule” that Dodd-Frank requires for residential mortgages to qualify for exclusion from the 5% “skin-in-the-game” rule, which was another key restriction on the securitization of residential mortgages coming from the landmark legislation.

None other that Barney Frank is tipping the market that the final rule will likely see a lower threshold than the 20% originally proposed.

This could be a very important development for the mortgage industry and the revival of something which resembles a healthy RMBS market in the US.  We’re on the record for taking this argument a step further and have suggested that the entire notion of the 5% skin-in-the-game rule is, in itself, arbitrary and unnecessary.  We believe that the 5% rule simply adds unnecessary cost to capital for issuers of securitized debt who already have a ton of skin-in-the-game in their mortgage businesses in the form of servicing risk, alternative cost of capital structures, future access to the capital markets, etc, etc.  In our opinion, trying to regulate underwriting standards by penalizing the processes by which firms raise capital is a clear case of attacking a problem from the wrong end.

Short of scrapping the entire section of the law related to QRM’s or “Qualified Residential Mortgages” (mortgages which would be exempted from the skin-in-the-game rule) and “skin-in-the-game”, any signficant reduction in the 20% hurdle for qualification should have a desirable effect on the cost of capital for RMBS issuers.  Perhaps the silver lining is to view this as a first step back towards some rationality.

About markferraris
Managing Principal Orchard Street Partners LLC

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