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Qualified residential mortgages and default risk

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  • Floros, Ioannis
  • White, Joshua T.

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.

Suggested Citation

  • Floros, Ioannis & White, Joshua T., 2016. "Qualified residential mortgages and default risk," Journal of Banking & Finance, Elsevier, vol. 70(C), pages 86-104.
    • Handle: RePEc:eee:jbfina:v:70:y:2016:i:c:p:86-104
    DOI: 10.1016/j.jbankfin.2016.06.007
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    References listed on IDEAS

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    Cited by:

    1. Schweikert, Jochen & Höchstötter, Markus, 2018. "Epidemiological spreading of mortgage default," Working Paper Series in Economics 112, Karlsruhe Institute of Technology (KIT), Department of Economics and Management.
    2. Rose, Jonathan, 2021. "Short-term residential mortgage contracts in American economic history," Explorations in Economic History, Elsevier, vol. 79(C).
    3. Craig Furfine, 2020. "The Impact of Risk Retention Regulation on the Underwriting of Securitized Mortgages," Journal of Financial Services Research, Springer;Western Finance Association, vol. 58(2), pages 91-114, December.

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    More about this item

    Keywords

    Qualified residential mortgage; Qualified mortgage; Risk retention; Mortgage default risk; Dodd–Frank; Residential mortgage-backed securities;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • R28 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Government Policy
    • H81 - Public Economics - - Miscellaneous Issues - - - Governmental Loans; Loan Guarantees; Credits; Grants; Bailouts
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law

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