Qualified Residential Mortgage: Background Data Analysis on Credit Risk Retention

Joshua White and Scott Bauguess

Abstract:

In 2011, the Commission, OCC, FRB, FDIC, FHFA, and HUD jointly proposed the criteria for a qualified residential mortgage (QRM). The Commission received comments2 on the 2011 proposing release that questioned both the relevance of the data used in the proposing release and the underlying analysis. For example, Genworth suggested that the Agencies’ analysis is flawed because (1) it reflects only loans purchased by GSEs and thus excludes mortgage originations held in non-GSE portfolios, and (2) multivariate analysis was not conducted and some QRM proposed parameters might not significantly impact default risk once the primary factors are held constant. Commentators were also concerned that (3) private mortgage insurance (PMI) was not examined in the proposing release. For example, Mortgage Guaranty Insurance Corporation (MGIC) cited studies by Milliman, Inc. and Promontory Financial Group that show a negative association between PMI and default risk, and pointed to the emphasis of the Dodd-Frank Act on mortgage insurance “to the extent such insurance or credit enhancement reduces the risk of default.”
This document provides an analysis of serious delinquencies among non-GSE securitized mortgages (“private label mortgages”) to address these comments, and to further understand the potential economic effects related to the definition of the term QRM. This analysis also considers the impact of the qualified mortgage (QM) definition on serious delinquency, including the effect of setting QRM guidelines narrower than those for QM.