Legislation Overview: Private Mortgage Market Investment Act of 2011

by benjamin_fendler on Nov 16, 2011

A discussion draft of the legislation was introduced October 31, 2011 by Senior House Financial Services Committee member Scott Garrett (R-NJ). Here is a summary of the key points:

• Requires the Federal Housing Finance Agency (FHFA) to establish classifications for mortgages-backed securities (MBS) – to be known as Qualified Securities (QS) – and set standards around key features of the securities in order for investors to appropriately price credit risk into the QS market. Further requires FHFA to establish criteria for each classification based on underwriting, pooling and servicing, and disclosures’ standards.

• Authorizes the FHFA director to establish standards of classification for the mortgages that collateralize QS based on a mortgagors’ debt-to-income ratio, loan-to-value ratio, credit history, loan documentation, occupancy, credit enhancement, and loan payment terms.

• Directs the FHFA to establish standard form securitization agreements for QS that include terms relating to: pooling and servicing; purchase and sale; representations and warranties; indemnification and remedies; and the qualifications, responsibilities, and duties of trustees.

• Establishes an application system for qualified sponsors of QS under which interested parties would submit applications to the FHFA demonstrating proof of their experience and integrity, compliance history with Federal and State laws, adequacy of insurance and fidelity coverage, and ability to regularly submit audited financial statements to the Agency.

• Grants the FHFA director broad supervisory and enforcement capabilities, with the authority to issue regulations, orders, and interpretations in order to establish a fully-liquid forward market for QS – similar to the Fannie Mae and Ginnie Mae to-be-announced (TBA) markets in which most agency mortgage-backed securities are sold today.

• Directs the FHFA to establish mandatory arbitration procedures under which all disputes between an owner of a QS and the qualified sponsor of such QS shall be subject in the event of a disagreement between investors and issuers on whether there was a breach obligating an originator or securitization sponsor to repurchase a loan or to indemnify a loss.

• Repeals Section 15G of the Securities Exchange Act of 1934 (the Credit Risk Retention provisions of the Dodd-Frank Act), and prohibits the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Consumer Financial Protection Bureau, and the Securities and Exchange Commission (SEC) from issuing any rule or regulation that would require risk retention for issuers of asset-backed securities (ABS) or require that an ABS include any premium capture cash reserve account

• Exempts QS from the registration requirements of the Securities Act of 1933.

• Directs the SEC to issue regulations within six months of the bill’s enactment that require sponsors of residential mortgage-backed securities (RMBS) to disclose all pertinent information relating to the residential mortgage loans that comprise such securities, including information regarding the income and credit score of borrowers, the loan to value ratios, and the remaining term to maturity of the loans.

• Directs the SEC to issue regulations within six months of the bill’s enactment that require sponsors of all ABS other than QS to file a preliminary prospectus containing all material terms of the transaction at least 5 days before investors make an investment decision.

• Directs the SEC to issue regulations within six months of the bill’s enactment that require the dissemination of transaction, volume, and pricing information of trades of all ABS other than QS.

• Requires the FHFA to issue regulations within six months of the bill’s enactment that require each mortgage loan comprising an RMBS be assigned and carry with it a unique alphanumeric code that identifies the loan in order to facilitate ascertaining relevant information about the loan.

• Permits a servicer of a first lien loan to charge additional fees if a mortgagor takes on a second lien loan that results in a combined loan-to-value of 80% or more by requiring notice to the servicer of the first if a second is put in place, and also in the context of servicer conflicts.

• Prohibits a servicer from servicing a first mortgage if the same servicer has an interest in a second lien secured by the same property.

• Prohibits any federal department or agency from requiring principal reduction for any securitized mortgage loan.

• Amends section 129C of the Truth in Lending Act to exempt mortgage loans collateralizing QS from the Qualified Mortgage (QM) definition established under the Dodd-Frank Act.

• Requires the Department of Housing and Urban Development (HUD), the Department of Veterans Affairs (VA), and the Department of Agriculture to prescribe rules – in consultation with the Consumer Financial Protection Bureau (CFPB) – defining the types of loans they insure guarantee, or administer, that qualify as QM’s.

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