Excessive risk retention may throttle mortgage finance: ASF
High-quality underwriting and a range of risk-retention options are still the keys to sound mortgage securitization, according to one industry trade group. Under the sweeping reforms of Dodd-Frank, federal financial regulators are tasked with defining a qualified residential mortgage to determine which loans will be exempt from new risk-retention requirements. The American Securitization Forum wants the regulators to establish new standards for income and asset verification, minimum borrower equity, and debt-to-income ratios that its members believe significantly strengthen the mortgage pools and "ensures appropriate credit can resume flowing to American homebuyers." Executive Director Tom Deutsch said members also seek new measures that better align interests of investors and issuers alike. "However, in order to avoid jeopardizing the fragile recovery of the RMBS market and promote the flow of affordable credit to prospective homeowners, it is essential that a balanced definition is developed for the qualified residential mortgage to ensue creditworthy borrowers qualify for the lowest mortgage rate possible.” The ASF said if a residential asset-backed security is composed entirely of qualified mortgages, sponsors of the debt are exempt from meeting the Dodd-Frank risk-retention requirements. In its letter to regulators, the group, which includes institutional investors and MBS issuers, said a range of risk-retention options is needed for securities that don't qualify for an exemption, "given critical accounting and risk-based capital considerations." Risk-retention rules that span different asset types uniformly won't achieve the reforms sought under Dodd-Frank, according to the ASF. The group wants sponsors of RMBS to have options such as retaining an interest in the first-loss tranche, or in each tranche, or in a randomly selected number of loans from the securitized pool of loans. Earlier this week, the Mortgage Bankers Association sent two letters to regulators outlining concerns about the risk-retention rules, saying it may constrict the mortgage market and lenders should "retain discretion" for determining who can and cannot receive a loan. The MBA expects few loans will be written outside the new qualified construct, making it much harder for many to get a mortgage. Regulators are expected to announce proposed rules in December and final mandates are due in April. Write to Jason Philyaw.