QRM premium capture reserve could hinder secondary market

QRM premium capture reserve could hinder secondary market Requiring a securitization sponsor to hold a premium on a deal in cash under the qualified residential mortgage standard could have the unintended consequence of being a disincentive for the secondary market.The "premium capture reserve account" puts banks at a disadvantage for securitization and forces substantial changes within that business structure. The premium reserve, as written in the QRM proposal released last week, would be loss absorbing and subordinate to all other tranches, effectively becoming the first loss on a deal, according to reports from JPMorgan Securities and Barclays Capital.According to JPMorgan Securities, the proposal fails to incorporate the costs of originating loans or the cost a sponsor may incur to buy the loan from an originator. Since most originators sell whole loans at a premium, JPMorgan expects the value of the premium to decline."If a premium received by the sponsor will not be released for five years and a 15% discount rate is applied (since it is a first loss), any premium value would be cut in half," the firm said.Barclays Capital said that banks' traditional origination channels would feel the effects of this reserve balance the most, and that it may make it difficult for banks to get true sale accounting treatment."The fact that this does not take into account costs that push a bank’s basis in originating the loan to above par means that the bank may be left paying out of pocket to fund the premium recapture account, which is worse than just holding the loan on portfolio," Barclays said.JPMorgan said for both these reasons the premium capture reserve account could potentially be a "deal-killer" for both agency and private-label securitizations. Barclays believes that based on the new standards, real estate investment trusts, asset managers and insurance companies will be making most of the new deals in the QRM space.Federal regulators provided a narrow definition of the QRM last week, and also voted in favor of an exemption rule set at 20% down payment. A qualified residential mortgage is one with a maximum 80% loan to value, on a property that is owner-occupied and has a 30-year amortization period with full documentation. A borrower must have a track record clear of 60-day delinquencies. This excludes interest-only loans and loans with premium penalties.JPMorgan said less than 20% of all GSE loans originated since 2001 would meet this standard, while roughly 20% to 25% of nonagency loans qualify.