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Moody's expects temporary GSE exemption from mortgage risk rules

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Analysts at Moody's Investors Service said Monday regulators may exempt Fannie Mae and Freddie Mac from upcoming mortgage risk retention rules – at least temporarily. The Dodd-Frank Act directed federal regulators to determine the standards for a qualified residential mortgage. Securitizers must retain 5% of the credit risk on loans written outside these standards, which may include a possible 20% down payment. Securitizers are allowed to pass the risk-retention requirement to originators, and Moody's expects the GSEs to do so if they aren't exempt. Speaking before the Senate Banking Committee last week, Treasury Secretary Timothy Geithner and Department of Housing and Urban Development Secretary Shaun Donovan said the GSEs would not be exempt from the qualified residential mortgage rules. However, other regulators maintain the GSEs would be exempt as long as they are in conservatorship. Moody's analysts said many market participants had hoped for the exemption given the fragile state of the housing industry, but another possibility would be a QRM definition fitting closely to the current GSE underwriting standards. Consumer advocacy and trade groups, including the National Association of Realtors wrote a letter to the regulators in March, expressing concern over the high down payments, noting that "hundreds of thousands" of creditworthy borrowers would be shut out of the market. "While we support a reasonable and affordable cash investment requirement, that requirement can be coupled with other underwriting features to ensure loan sustainability without unnecessarily narrowing access to credit," according to the letter. Federal regulators are scheduled to propose new QRM rules April 8, according to Dodd-Frank, and Moody's expects that by the second quarter of 2012, securitizers of new transactions must begin holding the risk. Loans outside of these standards will become scarce, analysts said, and those that are offered outside of QRM rules will come with high mortgage rates. Analysts did admit it was difficult to pin down how scarce these loans would become, but given the growth of GSE market share coming out of the crisis (click on chart below to expand) rules written with noticeably stricter requirements will not be good for a market still trying to recover. "Owing to an increase in mortgage rates and a decrease in mortgage availability, anything more than a minor portion of GSE loans being subject to risk retention will be negative for the fragile U.S. housing market and, in turn, holders of mortgage credit," Moody's said. Write to Jon Prior. Follow him on Twitter @JonAPrior.

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