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."
NAR estimates 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.
NAR said 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 revised. MBA 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 LTV.
- Eliminate the QRMs servicing requirements which MBA said have no place in the proposed regulations.
In addition to the QRM requirements, MBA takes issue with other factors in the retained risk regulations:
- MBA 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.
- The 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 typically appear.
- A loan that has been seasoned for two to three years before securitization should be exempted from risk retention.
- Comingling of QRM and non-QRM pools should be permitted with risk retention determined at the asset level.
- The proposed regulations impact on and alignment with measures proposed to restructure FHA and the GSEs should be evaluated.
- MISMO Standards used be used for data definitions and any proposed reporting requirements.
- Agencies should establish a specific framework for ensuring consistency in issuing and interpreting supervisory risk retention guidance.
- No rules should be implemented that hinder movement toward adoption of consumer-friendly electronic commerce including electronic signatures.
- There 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 regulatory requirements.
- A second round of comments should be allowed following any revisions and before issuing final regulations.