Risk Retention Regs Scrutinized by Housing Advocates

by devteam August 3rd, 2011 | Share

Two of housing’s major players have weighedrnin with comments on proposed standards for mortgage risk retention under thernDodd-Frank Wall Street Reform and Consumer Protection Act.  The National Association of Realtors® (NAR) andrnthe Mortgage Bankers Association each sent letters to representatives of thernsix regulatory agencies involved in formulating the standards and expressedrnconsiderable reservations over their direction and intent, especially thosernthat seek to define Qualified Residential Mortgages (QRM).  QRM loans would be exempt from the requirementrnthat securitizers keep a minimum 5 percent investment in thernloans they package for resale.  </p

NAR questioned what it called the “undulyrnnarrow definition” of QRM.  NAR PresidentrnRon Phipps said, “NAR firmly believes Congress intended to create a broad QRMrnexemption – strong evidence shows that responsible lending standards andrnensuring a borrower’s ability to repay have the greatest impact on reducingrnlender risk,” The proposed rule that such mortgages have a minimum 20 percentrndown payment, stringent debt-to-income ratio requirements and rigid creditrnstandards “will deny millions of Americans access to safe, low-cost mortgages,rnNAR said. Further, non-QRM mortgages will have higher interest rates and fees,rnmaking home ownership more expensive or unattainable for many homeowners.  The Realtor letter flatly requested thatrnregulators withdraw the proposed rule “and go back to the drawing board.”</p

NAR estimatesrnthat a non-QRM mortgage would be 80 to 185 basis points more expensive forrnconsumers than a qualifying mortgage.  Thernadditional costs, they say, will arise out of multiple factors. Since banksrnmust hold back 5 percent of each non-QRM mortgage-backed security issued theyrnwill not be able to re-use that capital for additional MBS or otherrnventures.  The sidelined capital willrnneed to be managed, incurring costs. rnWith this capital locked up, only those with large portfolios will bernable to compete in this market and with fewer regulations, the larger varietyrnof mortgages in the non-QRM space might make it more difficult to creaternstandardized securities.  Also, non-QRMrnloans will be perceived as being more risky than QRM loans. </p

NAR saidrnthat the new regulations will also introduce volatility into the system,rnparticularly as the government’s role in securitization declines.  </p

The MBA letter said that the Associationrnbelieves that the proposed regulations and structure of the QRM deviaternsignificantly from what Congress intended and are likely to have a dramaticrnimpact on the housing finance system unless they are substantiallyrnrevised. MBArnlaid out a list of their concerns both with the QRM and with otherrnregulations.  They suggested thatrnstandards for the QRM be revised to:</p<ul class="unIndentedList"

  • Eliminate thernmandatory requirements for loan to value (LTV) and down payment requirements,rnhardwired debt to income (DTI) ratios, and credit scores and instead enforce underwriterrnverification of underlying information but permit compensating factors for thernrequirements in the context of prudent underwriting.</li
  • Synchronize thernQRM standards with the QM standards to include, among other things, anrnexception for two discount points and relief for smaller loans.</li
  • Consider creditrnenhancements if the regulators determine that there must be a restriction onrnLTV. </li
  • Eliminate thernQRMs servicing requirements which MBA said have no place in the proposedrnregulations.</li</ul

    In addition to the QRM requirements, MBArntakes issue with other factors in the retained risk regulations:</p<ul class="unIndentedList"<liMBArnrequests that the Premium Capture Cash Reserve Account (PCCRA) provisions berneliminated. These requirements, it says,rnwill make the securitization execution channel uneconomical for many lenders,rnraise consumer borrowing costs, and make it harder for borrowers to obtain raternlocks and finance loan costs as part of the loan rate.</li<liThernrisk-retention should be sunset with a date certain which MBA recommends be betweenrntwo to three years after loan origination.rnThat is the period in which improper underwriting or other loan defectsrntypically appear.</li<liArnloan that has been seasoned for two to three years before securitization shouldrnbe exempted from risk retention.</li<liCominglingrnof QRM and non-QRM pools should be permitted with risk retention determined atrnthe asset level.</li<liThernproposed regulations impact on and alignment with measures proposed tornrestructure FHA and the GSEs should be evaluated.</li<liMISMOrnStandards used be used for data definitions and any proposed reportingrnrequirements.</li<liAgenciesrnshould establish a specific framework for ensuring consistency in issuing andrninterpreting supervisory risk retention guidance.</li<liNornrules should be implemented that hinder movement toward adoption ofrnconsumer-friendly electronic commerce including electronic signatures.</li<liTherernshould be a comprehensive review of the impact of the proposal on consumers,rnlenders, securities issuers, investors and the overall economy including anrnanalysis of the interaction between the proposed regulations and otherrnregulatory requirements.</li<liArnsecond round of comments should be allowed following any revisions and beforernissuing final regulations.</li</ul


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  • About the Author


    Steven A Feinberg (@CPAsteve) of Appletree Business Services LLC, is a PASBA member accountant located in Londonderry, New Hampshire.

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