Risk-retention repeal gains momentum
The comment period on the recent risk-retention rule is less than one month away, and more cases are being made against the policy and requirements for its exception: the qualified residential mortgage. Federal regulators proposed a rule in March requiring issuers to maintain 5% of the risk in securities backed by assets such as mortgages. Along with the rule, regulators detailed requirements for the QRM, which issuers would not have to maintain the risk on. Before a House subcommittee this week, Joshua Rosner, managing director at the research firm Graham Fisher & Co. said the risk-retention rules "are well intentioned but misguided." Rosner said the risk retention rule would only support the growth of "too big to fail." If the issuer believes it has the balance sheet to absorb the losses or that it will be the first to receive assistance or bailouts in the future, they would ignore the risk, Rosner said. But more likely, Rosner believes these companies still do not have the capability to understand the "power of the poison" in these products. "Often, as we witnessed with Bear Stearns and Merrill Lynch, these firms didn’t have the operational controls, available information or resulting ability to fully model their exposures," Rosner said. "To force them to increase concentrations of these held securities will only increase their risks." The National Association of Realtors also continued pressuring rule-makers to ease requirements on the QRM. During a session at the NAR expo Thursday, the trade group's president Ron Phipps said the 20% downpayment requirement would only drive borrowers to the Federal Housing Administration. In fact, the FHA's own Acting Director Bob Ryan recently testified before Congress stating that a 10% downpayment might be a better threshold. The QRM rule also limits mortgage payments to 28% of gross income, what NAR called "a very tight standard." "Congress came up with the QRM concept to ensure that banks were only putting up ‘safe’ loans for securitization. Sounds good, but in practice, it’s a problem. Regulators have now come up with very draconian and narrow parameters for what constitutes a QRM," said Phillip Schulman, a partner at the law firm K&L Gates. Rosner said a better solution would be to increase loan-level disclosures on these securities. While he advocates a repeal of the risk retention rule, regulators cannot ignore the lack of information flowing between buyer and seller. The Federal Housing Finance Agency Acting Director Edward DeMarco said Wednesday his office will ensure investors in agency MBS will receive loan-level data in the future. Agency MBS is exempt from risk-retention rules because Fannie and Freddie already maintain 100% of the risk. Rosner said establishing common language and standards for delinquency and default would also reinforce a private securitization market that has yet to return for the mortgage industry. He also pointed out the need to align the interests between servicers and investors for these pooled loans in a vital securitization market. "Neither real estate nor the economy itself can find a self-sustaining recovery without first restarting this important tool," Rosner said. "Liquidity cannot efficiently find its intended target unless there are credible markets in which participants can foster financial intermediation and through which capital can be transmitted." Write to Jon Prior. Follow him on Twitter @JonAPrior.