Two of housing’s major players have weighed
in with comments on proposed standards for mortgage risk retention under the
Dodd-Frank Wall Street Reform and Consumer Protection Act. The National Association of Realtors® (NAR) and
the Mortgage Bankers Association each sent letters to representatives of the
six regulatory agencies involved in formulating the standards and expressed
considerable reservations over their direction and intent, especially those
that seek to define Qualified Residential Mortgages (QRM). QRM loans would be exempt from the requirement
that securitizers keep a minimum 5 percent investment in the
loans they package for resale.
NAR questioned what it called the “unduly
narrow definition” of QRM. NAR President
Ron Phipps said, “NAR firmly believes Congress intended to create a broad QRM
exemption – strong evidence shows that responsible lending standards and
ensuring a borrower’s ability to repay have the greatest impact on reducing
lender risk,” The proposed rule that such mortgages have a minimum 20 percent
down payment, stringent debt-to-income ratio requirements and rigid credit
standards “will deny millions of Americans access to safe, low-cost mortgages,
NAR said. Further, non-QRM mortgages will have higher interest rates and fees,
making home ownership more expensive or unattainable for many homeowners. The Realtor letter flatly requested that
regulators withdraw the proposed rule “and go back to the drawing board.”
that a non-QRM mortgage would be 80 to 185 basis points more expensive for
consumers than a qualifying mortgage. The
additional costs, they say, will arise out of multiple factors. Since banks
must hold back 5 percent of each non-QRM mortgage-backed security issued they
will not be able to re-use that capital for additional MBS or other
ventures. The sidelined capital will
need to be managed, incurring costs.
With this capital locked up, only those with large portfolios will be
able to compete in this market and with fewer regulations, the larger variety
of mortgages in the non-QRM space might make it more difficult to create
standardized securities. Also, non-QRM
loans will be perceived as being more risky than QRM loans.
that the new regulations will also introduce volatility into the system,
particularly as the government’s role in securitization declines.
The MBA letter said that the Association
believes that the proposed regulations and structure of the QRM deviate
significantly from what Congress intended and are likely to have a dramatic
impact on the housing finance system unless they are substantially
laid out a list of their concerns both with the QRM and with other
regulations. They suggested that
standards for the QRM be revised to:
- Eliminate the
mandatory requirements for loan to value (LTV) and down payment requirements,
hardwired debt to income (DTI) ratios, and credit scores and instead enforce underwriter
verification of underlying information but permit compensating factors for the
requirements in the context of prudent underwriting.
- Synchronize the
QRM standards with the QM standards to include, among other things, an
exception for two discount points and relief for smaller loans.
- Consider credit
enhancements if the regulators determine that there must be a restriction on
- Eliminate the
QRMs servicing requirements which MBA said have no place in the proposed
In addition to the QRM requirements, MBA
takes issue with other factors in the retained risk regulations:
requests that the Premium Capture Cash Reserve Account (PCCRA) provisions be
eliminated. These requirements, it says,
will make the securitization execution channel uneconomical for many lenders,
raise consumer borrowing costs, and make it harder for borrowers to obtain rate
locks and finance loan costs as part of the loan rate.
risk-retention should be sunset with a date certain which MBA recommends be between
two to three years after loan origination.
That is the period in which improper underwriting or other loan defects
loan that has been seasoned for two to three years before securitization should
be exempted from risk retention.
of QRM and non-QRM pools should be permitted with risk retention determined at
the asset level.
proposed regulations impact on and alignment with measures proposed to
restructure FHA and the GSEs should be evaluated.
Standards used be used for data definitions and any proposed reporting
should establish a specific framework for ensuring consistency in issuing and
interpreting supervisory risk retention guidance.
rules should be implemented that hinder movement toward adoption of
consumer-friendly electronic commerce including electronic signatures.
should be a comprehensive review of the impact of the proposal on consumers,
lenders, securities issuers, investors and the overall economy including an
analysis of the interaction between the proposed regulations and other
second round of comments should be allowed following any revisions and before
issuing final regulations.