MBA Urges Flexbility in Interpretation of Risk Retention Regs. What Counts as Qualified?
In a letter sent to most of thernfinancial and regulatory players in the Obama Administration, the MortgagernBankers Association (MBA) called mortgage underwriting “an art and not arnscience” and urged flexibility in setting mortgage regulations under thernDodd-Frank Wall Street Reform and Consumer Protection Act (DFA). </p
At stake are the type of mortgages that willrnbe exempted from DFA requirements that lenders maintain a 5 percent stake (6rnpercent for loans being sold to Ginnie Mae) in loans they underwrite that fallrnoutside of the definition of Qualified Residential Mortgages (QRM) to insurernthat those lenders retain a share in the riskiest loans. </p
DFA specifically exempts loansrnmade, insured, guaranteed, or purchased by or under the auspices of the FarmrnCredit Administration, FHA, or VA from the risk retention requirement but does directly exem,pt Freddie Mac, Fannie Mae, or the Federal HomernLoan Banks. Federal banking agencies andrnthe Securities and Exchange Commission have 270 days from the passage of the DFA to jointly prescribe rulesrnregarding the risk retention which must include separate requirements forrndifferent asset classes and allocation of the retention amount between securitizerrnand originator. The rulemaking processrnfor residential mortgage backed securities will also involve the participationrnof Housing and Urban Development and the Federal Housing Finance Agency.</p
In the letter, sent to the headsrnof eight federal departments and agencies, MBA set forward its perspective and recommendationsrnfor defining both QRM and the exceptions lying outside that definition, sayingrnthat the impact on the availability of credit stemming from the design of therntwo factors “cannot be overestimated.” These factors “will largely govern whorncan and cannot achieve homeownership for years to come. Few loans to ordinary customers are likely tornbe made outside the QRM construct; the loans that are made will be costlier andrnlikely to be made only to more affluent customers.</p
Minimizing the volume of loansrnthat fall under the risk retention rule is critical to MBA members. As Jim Russell explained on MND on October 6,rnthe retention will not be as difficult for a depository institution as it willrnbe for independent mortgage bankers who “will be required to raise capital to supportrntheir portfolio or take on the new role of a mortgage broker. Not only will the once highly leveragedrnMortgage Banking industry be required to have “skin in the game” they will havernto have substantial capital positions just to play in the game!”</p
In its letter MBA said regulatorsrnshould “avoid establishing static,rnprescriptive criteria that do not allow lenders the ability to considerrncompensating factors in meeting the financing needs of qualified borrowers,”rnbut should define QRM using flexible guidelines to preserve lenders’ ability tornadopt to borrowers needs including regional and other demographic nuances. The letter suggested a definition of QRM thatrnwould follow these guidelines: </p<ul class="unIndentedList"<liTermsrnsuch as balloon payments, terms exceeding 30 years, or negative amortizationrnwould be excluded;</li<liAdjustablernrate mortgages would have an initial adjustment at least three or possibly fivernyears after origination;</li<liRequirernfull documentation;</li<liOnlyrninclude Debt to Income Ratio Standards (DTIs) with compensating factors. MBA said that, if specific numericalrnstandards are prescribed, DTIs should not be held under 50 percent withoutrnspecific compensating factors that would permit higher ratios such asrnsignificant levels of liquid assets or residual income.</li<liRequirerncredit enhancement such as mortgage insurance for loans with loan-to-valuernhigher than 80 percent;</li<liPermitrninterest only mortgages if they are underwritten at the fullyrnindexed/amortizing payment and meet other documentation requirements.</li</ul
MBA also told regulators theyrnshould be mindful of the relation between the QRM definition Federal HousingrnAdministration (FHA) eligibility requirements. rnOtherwise, as FHA is statutorily exempted by the risk retention requirements,rnthere is danger that the FHA program could be over-utilized. It also urged that regulators heed recentrnrecommendations to Congress from the Federal Reserve regarding risk retentionrnand securitization as they would “promote the purposes of the DFA withoutrnunnecessarily reducing the supply of credit.</p
MBA stated that, “While thernrules should not condone risky lending practices, unnecessarily constrainingrnthe mortgage market will not only deny the American dream of homeownership tornmany qualified persons, it will further depress the housing market and threatenrnthe economic recovery. We must alsornremember that many of the loan products and characteristics under considerationrnto be restricted were, for many years, not problematic when underwrittenrnprudently.” </p
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