Qualified Residential Mortgages and Default Risk

66 Pages Posted: 16 Aug 2014 Last revised: 16 Jun 2016

See all articles by Ioannis V. Floros

Ioannis V. Floros

University of Wisconsin - Milwaukee - Department of Finance

Joshua T. White

Vanderbilt University - Finance

Date Written: June 5, 2016

Abstract

The Dodd-Frank Act tasks regulators with defining a Qualified Residential Mortgage (QRM) as an exemption from risk retention for residential mortgage-backed securities. Congress instructs regulators to consider factors that result in lower levels of historic default in defining a QRM. We analyze non-agency loans and find credit scores and loan-to-value ratios are among the most significant predictors of default, even when controlling for risky loan products and loose underwriting standards. Importantly, credit scores and loan-to-value ratios better tradeoff the benefit of reduced default risk with the cost of limiting access to capital than most factors, yet are absent from the final QRM definition. Our results have important implications for current and future policy on residential mortgage securitization, risk retention, and disclosure.

Keywords: Qualifi ed Residential Mortgage, Qualified Mortgage, QRM, QM, Risk retention, Mortgage default risk, Dodd-Frank, Residential mortgage-backed securities

JEL Classification: G21, G28, R28, H81, K22

Suggested Citation

Floros, Ioannis V. and White, Joshua T., Qualified Residential Mortgages and Default Risk (June 5, 2016). Journal of Banking and Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2480579 or http://dx.doi.org/10.2139/ssrn.2480579

Ioannis V. Floros

University of Wisconsin - Milwaukee - Department of Finance ( email )

Milwaukee, WI 53201-0742
United States

Joshua T. White (Contact Author)

Vanderbilt University - Finance ( email )

401 21st Avenue South
Nashville, TN 37203
United States

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