mortgage market

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.

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