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Safe Mortgage — A Simple Definition:

As part of the Frank-Dodd financial reform bill that passed earlier this year, mortgage lenders will be required to hold 5% of the risk of a loan that is packaged up into a mortgage-backed-security. When the law was passed, there was an exemption for certain loans called “qualified residential mortgages” from the rule that requires lenders to hold 5% of the risk.

Currently there is a discussion of what qualifies as a “qualified residential mortgage” and a decision on what exactly qualifies as a qualified residential mortgage is sometimes also referred to as a “safe mortgage” because the lender can lend money on a safe mortgage and not be required to retain 5% of the risk.

Safe Mortgage — An Expanded Definition:

Should you really care what the decision is as to what mortgages can be determined to be safe mortgages?

Probably.

Simply put, whatever mortgage products are determined to meet the qualified residential mortgage exemption are most likely to be the ones that lenders focus on providing and possibly may become the only mortgage products that lenders will provide over time.

The most probable types of loans that will require a lender to retain 5% of the risk include loans that:

  • contain  pre-payment penalties
  • require balloon payments
  • may result in a rising loan balance
  • don’t fully document a borrowers’ income and/or assets.

There is also a big “maybe” group of mortgage products that are up for debate as to whether or not lenders will be required to hold 5% of the risk including adjustable rate mortgages and interest only mortgages.

Regardless of what mortgage products are determined to be safe mortgages – one thing that is likely to happen as a result of the Frank-Dodd act passed is that whatever mortgage products that are defined to not meet the qualified residential mortgage exemption are not very, well …

safe.

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