Pending legislation would force mortgage bankers to retain “skin in the game” on residential loans they originate — a move that could be catastrophic according to the industry’s primary trade group. In addition, the group is calling for commercial mortgage lenders to be completely exempt from such legislation.
In a letter to Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, and Rep. Spencer Bachus (R-Ala.), Mortgage Bankers Association President and Chief Executive Officer John Courson warned that the proposed Financial Stability Improvement Act would have “dire consequences” for the mortgage markets.
Under the proposed bill, lenders would be required to retain as much as 10 percent of the credit risk even if they intend to resell the loan in the secondary market. In addition, conduits that accumulate loans for subsequent securitization would also be required to retain up to 10 percent of the risk.
“If the requirements under Financial Stability Improvement Act are made applicable to all creditors for residential loans, independent mortgage bankers would be forced out of business,” Courson warned. “At the same time, smaller community banks and even larger depositories would be constrained from lending — and available funds for home financing would be reduced by countless billions of dollars — to meet reserve requirements.”
Courson said many of the concerns by Congress are already addressed in H.R. 1728, the Mortgage Reform and Anti-Predatory Lending Act. That legislation — which has already been approved by the U.S. House of Representatives and is likely to be merged with a larger bill moving through the House — would only require a 5 percent risk retention on mortgages with negative amortization, balloon payments and higher interest rates. In addition, only securitizers of the riskier loan types would be subject to the restrictions.
The trade group also warned that the application of risk retention on commercial mortgages would hamper the recovery of the ailing commercial real estate market. Commercial mortgages are sophisticated business-to-business transactions and do not require consumer protections.
Courson explained that commercial mortgage-backed securities investors who suffer the first losses in the transactions perform “exhaustive due diligence” on the loan pools — eliminating the need for risk retention by lenders.
“We urge policymakers to ensure that reforms aimed at the securitized credit markets are customized and applied appropriately to the mortgage markets to avoid unintended consequences,” the letter said. “Tailoring the final regulatory reform proposals and avoiding a ‘one-size-fits-all’ approach will better protect consumers and support efforts to restore lending for housing — and the capital markets’ investments that fuel such lending — that is critical to our nation’s recovery.”
