A revised risk retention rule has been proposed by federal regulators and agencies. While mortgage bankers are happy with some of the revisions, they still take issue with other aspects of the proposal.
A risk retention rule proposed in March 2011 would require sponsors of asset-backed securities to retain 5 percent of the underlying assets’ credit risk on loans that aren’t guaranteed by the U.S. government or designated as Qualified Residential Mortgages.
Issuing the proposed rule were the Federal Reserve Board, the Federal Housing Finance Agency, the Department of Housing and Urban Development, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corp. and the Securities and Exchange Commission. The Treasury Secretary, as chairperson of the Financial Stability Oversight Council, played a coordinating role in the rulemaking.
The regulators were implementing requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
In order to be considered QRMs, residential loans would need to be “very high credit quality” mortgages based on credit histories and maximum loan-to-value ratios of 80 percent — regardless of whether mortgage insurance is obtained. HUD also outlined a second QRM alternative that only required a 10 percent downpayment.
Responses to the proposal were swift and severe — with many stakeholders warning of diminished mortgage lending as a result of the rule.
Regulators listened and on Wednesday proposed a revised risk-retention rule.
According to the new proposal, ABS sponsors will be provided with several options to satisfy the risk retention requirements.
“The original proposal generally measured compliance with the risk retention requirements based on the par value of securities issued in a securitization transaction and included a so-called premium capture provision,” today’s statement said. “The agencies are now proposing that risk retention generally be based on fair value measurements without a premium capture provision.”
Mortgage Bankers Association President and Chief Executive Officer David H. Stevens issued a statement praising the elimination of the premium capture proposal.
But he noted that his group is concerned that regulators are still considering an alternative option that would add a 30 percent down payment or equity requirement to the QRM definition.
“As we detailed in our original comments on the rule, such steep down payment requirements are unnecessary to accomplish the purposes of the QRM standard and would severely impair access to credit for all but the most well-heeled borrowers” Stevens explained.
One important change in the new rule is that QRMs will be defined based on the Consumer Financial Protection Bureau’s Qualified Mortgage definition. Industry representatives had called for such a move.
MBA’s Stevens said the trade group is “extremely pleased” with the alignment of QRM with QM.
“The QM standard already clearly stipulates what is considered to be a safe and sound loan,” Stevens said. “Adding additional layers of regulation would have contracted credit for first time home buyers and borrowers without large down payments, and prevented private capital from entering the market.”
The Independent Community Bankers of America issued a statement echoing MBA’s pleasure with the alignment.
“ICBA is pleased that the proposed rule would include ‘qualified mortgage’ loans as defined under the ability to repay rules issued by the CFPB and loans backed by Fannie Mae and Freddie in the ‘qualified residential mortgage’ definition,” the statement said.
The new proposal also seeks comments on an alternative QRM definition that would include certain underwriting standards in addition to the QM criteria.
As was originally proposed, commercial mortgage securitizations would not be subject to risk retention.
“Further, the rule would recognize the full guarantee on payments of principal and interest provided by Fannie Mae and Freddie Mac for their residential mortgage-backed securities as meeting the risk retention requirements while Fannie Mae and Freddie Mac are in conservatorship or receivership and have capital support from the U.S. government,” today’s statement said. “This provision also is unchanged from the original proposal.”
The ICBA noted that the vast majority of residential loans originated and sold by community banks are sold to Fannie and Freddie.
“So today’s action would allow many community banks to continue to provide their customers with long-term mortgages,” the association said. “The proposed approach would establish a clear set of rules with fewer impediments to credit availability than the original proposal, which included a 20 percent down payment requirement.”
Comments are being accepted by the agencies until Oct. 30.
