In a press release and a conference call on Wednesday officers of the Mortgage Bankers Association (MBA) outlined the association's regulatory and legislative priorities for the coming year.  The Dodd-Frank Financial Reform Act, the release said, established a blueprint for the most significant overhaul of the financial services industry since the Great Depression and is a major focus of MBA activities.

John Courson, president and CEO, said that Dodd-Frank set out a skeleton for reform and now regulators with input from stakeholders such as MBA are putting meat on the bones. Michael Berman, MBA chairman, said that there will probably be some 200 regulations emerging out of the Dodd-Frank Financial Reform Act, about 100 of which will be of direct concern to MBA members.  At the same time other regulators are working on the same topics for different reasons.  Berman said that MBA is concerned with the possibility of "dueling rules" and is making it a priority to help regulators "sync up" the various rule sets.

Of major concern is the definition of a qualified residential mortgage (QRM) which would not be subject to the 5 percent risk retention provision for securitization.  MBA stresses that, while the criteria for establishing a QRM should be consistent with a lower risk of default, it is important that it not constrain credit for qualified borrowers and preserves lender discretion by exempting loans with lower risk characteristics such as full documentation, reduced risk of payment shock, and mortgage insurance or other credit enhancements.  One proposal, to require an LTV of 70 percent or less for a QRM would "shut the door" on the majority of borrowers, Courson said.  They would have to go outside the system, either to higher priced lenders or to FHA, putting additional pressure on an already overburdened agency.

Courson said that QRM will be "a defining moment for consumers and lenders," establishing the quality, availability and cost of loans.  At the same time, new servicing standards are needed but Courson said it would be a terrible mistake to include servicing standards in the QRM debate; to do so would be to give short shrift to both.

Proceeding on a separate track is the development of definitions for a qualified mortgage which the Dodd-Frank Act requires from the new Consumer Financial Protection Bureau (CFPB).  These will require lenders to make a good faith determination that the consumer has a reasonable ability to repay the loan.  The law permits lenders to avoid liability if they can presume that the loan is a "qualified mortgage."  While the law includes several criteria to define these mortgages, it leaves significant discretion to CFPB to modify those criteria.  Because of the liability that will attach to non-qualified mortgages they will be much costlier or even unavailable so it is important that the defining criteria be shaped carefully so as not to constrain the availability of credit.  It is also critical that the definitions for QRMs and QMs be consistent and their implementation coordinated to avoid unnecessary regulatory burdens and costs.  

MBA supports a flexible approach to developing risk retention regulations for commercial securitization.  This would include a 5 percent vertical risk retention slice structured so as not to cause a prudent originator or issuer to consolidate the entire commercial mortgage backed security (CMBS) issues on their balance sheets.  The allocation of risk between issuers and originators should be structured to foster competition and recognize different business models.  MBA also supports provisions allowing the reduction of the five percent retained risk which would include an investor holding a first-loss position that is five percent or greater of the issuance that is held for a duration during which most of the loan defaults are expected to occur and loans that allow them to be defined as low risk, accompanied by industry-supported representations and warranties.

Courson said that MBA has long advocated for simplification of the residential mortgage disclosure forms required under RESPA/TILA and is pleased that the administration has made it a high priority.  The form that results should be simple enough for borrowers to use it to shop for the best loan.

A key priority for MBA during the year will be to seek a coordinated and rational plan for implementing the broad powers of CFPB.  Courson said it is important that the actions of the bureau not be so burdensome to businesses that it limits credit to those customers it is designed to protect. There is also concern about the current lack of oversight of the new agency and whether it will act to coordinate with the states to insure uniformity of regulations.

Several tax issues are also on MBA's agenda.  It is working to insure the continued tax deductibility of home mortgage interest and real estate taxes and seeking the reinstatement of the deduction for private mortgage insurance.   "This is not the time," Courson said, "to change the tax code in a fragile and struggling part of the economy." In the commercial realm, MBA opposes any legislative initiatives that would tax carried interest as ordinary income rather than as capital gains.

A proposed change in commercial real estate accounting rules would require the balance sheet treatment of real estate leases.  This would "greatly complicate the accounting treatment of commercial leases without offering any corresponding user benefit," the release said.  Tenants might seek shorter leases to minimize the impact of the change and this would negatively affect property values.

The administration's proposal for restructuring the government's involvement in housing finance is expected in a month or so and Berman said that there are a lot of directions that could go. "It is fair to divide the world," he said, "into those who want a private free market model with no government involvement and those who want a government guarantee of some type that would provide protection for borrowers and taxpayers."  He described the first group as small and the large as being a majority of banks, borrowers, and realtors.

MBA supports a model with a new type of MBS with two components; a security-level government guaranteed "wrap" which would be explicit and focused on the credit risk of the security and a second loan-level guarantee provided by privately owned, government chartered mortgage credit guarantor entities (MCGEs).  These MCGEs would be built on the infrastructures of Fannie Mae and Freddie Mac, using their technology, staff, documents, and existing relationships and overseen by a strong federal regulator.  Additional MCGEs could be chartered to provide more competition.  They would securitize standard loan products but leave plenty of room in the market for private label securities and for FHA, VA, and USDA rural lending.

MBA would also like to see the government's standard conforming loan limits retained until the market stabilizes and FHA multi-family limits raised for elevator buildings because of the higher costs involved in construction requiring elevators.

While MBA wants servicing standards divorced from other issues under review, late last year it established the Council on Residential Mortgage Servicing for the 21st Century.  The Council will look at the current state and next evolution of mortgage servicing and design recommendations for government and industry to improve it.  The examination will include but it not limited to the economics of mortgage servicing, loss mitigation practices, and foreclosure processes.  Courson said that there is a need to align the servicers' responsibilities to borrowers and investors with the model of compensation.