By Kevin Chiu
Six federal agencies are proposing a rule that would require banks and mortgage companies to retain at least 5% of the mortgages they make, and not sell them to the investment market to hedge against credit risk. But the proposal is being opposed by the banking industry as part of the Dodd-Frank Wall Street financial reform act.
“We have profound concerns about its implications for residential mortgage financing and the nation’s economy today,” said Mortgage Bankers Association President John Courson.
The proposal, headed by the Federal Reserve, FDIC and the Office of the Comptroller of the Currency would require lenders to retain 5% of mortgages made to borrowers with less than perfect credit and down payments of less than 20%. The rule would not cover most commercial real estate loans or automobile loans that meet certain underwriting standards.
However, the rules provide lenders a way of avoiding the retention of the small pool of mortgages if they are sold to Fannie Mae or Freddie Mac or insured by federal agencies like the Federal Housing Administration (FHA). Freddie and Fannie presently make more than 90% of all underwritten US mortgages.
“While we believe that the exemption for loans sold to Fannie Mae and Freddie Mac while they remain in conservatorship will help provide liquidity during the current period of market instability, we do note that such an exemption does little to shrink the government’s footprint in the housing finance system and could slow the return of the private secondary mortgage market,” said Courson.
The risk retention rule is required by the Dodd-Frank financial reform act, but many outside of the banking industry say the reforms do not go far enough to protect consumers from another mortgage crisis and should require lenders to retain a larger pool of the mortgages they sell.
However, mortgage companies and banks reluctance to offer loans except to the best of credit worthy home loan candidates is making it difficult for many potential borrowers even with good credit to get a mortgage.
The slow down in mortgage financing has left the housing market at a sluggish pace in most areas of the country, despite low mortgage rates as more consumers pay cash for homes they are purchasing, and bankers hold on to their cash as foreclosures climb, triggering higher home loan losses.
The proposal would establish a definition for “qualified residential mortgages” (ORMs) incorporating criteria such as borrower credit history, payment terms, and loan-to-value ratios designed to ensure borrowers are of “very high credit quality.” The rule also includes investor disclosure requirements, which were not required in prior years and cost millions of dollars to investors on Wall Street who bought mortgage-backed securities.