In a letter sent to most of the financial and regulatory players in the Obama Administration, the Mortgage Bankers Association (MBA) called mortgage underwriting "an art and not a science" and urged flexibility in setting mortgage regulations under the Dodd-Frank Wall Street Reform and Consumer Protection Act (DFA).
At stake are the type of mortgages that will be exempted from DFA requirements that lenders maintain a 5 percent stake (6 percent for loans being sold to Ginnie Mae) in loans they underwrite that fall outside of the definition of Qualified Residential Mortgages (QRM) to insure that those lenders retain a share in the riskiest loans.
DFA specifically exempts loans made, insured, guaranteed, or purchased by or under the auspices of the Farm Credit Administration, FHA, or VA from the risk retention requirement but does directly exem,pt Freddie Mac, Fannie Mae, or the Federal Home Loan Banks. Federal banking agencies and the Securities and Exchange Commission have 270 days from the passage of the DFA to jointly prescribe rules regarding the risk retention which must include separate requirements for different asset classes and allocation of the retention amount between securitizer and originator. The rulemaking process for residential mortgage backed securities will also involve the participation of Housing and Urban Development and the Federal Housing Finance Agency.
In the letter, sent to the heads of eight federal departments and agencies, MBA set forward its perspective and recommendations for defining both QRM and the exceptions lying outside that definition, saying that the impact on the availability of credit stemming from the design of the two factors "cannot be overestimated." These factors "will largely govern who can and cannot achieve homeownership for years to come. Few loans to ordinary customers are likely to be made outside the QRM construct; the loans that are made will be costlier and likely to be made only to more affluent customers.
Minimizing the volume of loans that fall under the risk retention rule is critical to MBA members. As Jim Russell explained on MND on October 6, the retention will not be as difficult for a depository institution as it will be for independent mortgage bankers who "will be required to raise capital to support their portfolio or take on the new role of a mortgage broker. Not only will the once highly leveraged Mortgage Banking industry be required to have "skin in the game" they will have to have substantial capital positions just to play in the game!"
In its letter MBA said regulators should "avoid establishing static, prescriptive criteria that do not allow lenders the ability to consider compensating factors in meeting the financing needs of qualified borrowers," but should define QRM using flexible guidelines to preserve lenders' ability to adopt to borrowers needs including regional and other demographic nuances. The letter suggested a definition of QRM that would follow these guidelines:
- Terms such as balloon payments, terms exceeding 30 years, or negative amortization would be excluded;
- Adjustable rate mortgages would have an initial adjustment at least three or possibly five years after origination;
- Require full documentation;
- Only include Debt to Income Ratio Standards (DTIs) with compensating factors. MBA said that, if specific numerical standards are prescribed, DTIs should not be held under 50 percent without specific compensating factors that would permit higher ratios such as significant levels of liquid assets or residual income.
- Require credit enhancement such as mortgage insurance for loans with loan-to-value higher than 80 percent;
- Permit interest only mortgages if they are underwritten at the fully indexed/amortizing payment and meet other documentation requirements.
MBA also told regulators they should be mindful of the relation between the QRM definition Federal Housing Administration (FHA) eligibility requirements. Otherwise, as FHA is statutorily exempted by the risk retention requirements, there is danger that the FHA program could be over-utilized. It also urged that regulators heed recent recommendations to Congress from the Federal Reserve regarding risk retention and securitization as they would "promote the purposes of the DFA without unnecessarily reducing the supply of credit.
MBA stated that, "While the rules should not condone risky lending practices, unnecessarily constraining the mortgage market will not only deny the American dream of homeownership to many qualified persons, it will further depress the housing market and threaten the economic recovery. We must also remember that many of the loan products and characteristics under consideration to be restricted were, for many years, not problematic when underwritten prudently."