Mortgage groups talk up risk retention as comment period ends
Mortgage industry trade groups sent a flurry of letters to federal regulators this week in efforts to alter the upcoming risk-retention rule before the extended comment period expired Aug. 1. The rule, proposed in April under the Dodd-Frank Act, would require lenders to maintain 5% of the risk on all loans pooled into securities. The most heated debate revolves around the rule's exception: the qualified residential mortgage. Among requirements such as a strict debt-to-income limit and new servicing standards, the QRM must have at least 20% down from the borrower, according to the initial proposal. The comments could be divided into two camps: those who claim the current QRM standards would constrict a still struggling housing market and those who would like to see their businesses included in the QRM definition. While regulators are mulling over the comments, a spokesperson for the Federal Reserve could not give a timeline for when the final rule would be published. The Mortgage Bankers Association CEO David Stevens said the rule as it is currently written deviates from the original lawmakers' intent. The mortgage bankers would rather eliminate the QRM, its mandatory debt-to-income thresholds, servicing standards and the down payment requirement. "While a reasonable and affordable cash investment or LTV requirement may be warranted, the rules should not hardwire a specific amount but instead permit offsetting factors in the context of prudent underwriting," Stevens wrote. "Higher LTV loans may pose greater risks. However, these risks can be mitigated by compensating factors such as strong credit and appropriate documentation." The National Association of Realtors letter complained that mortgages written outside of the QRM would carry higher interest rates and fees, choking off what little demand remains on the market. "The proposed rule should be withdrawn, revised and republished for public comment. If not, then millions of hard-working, creditworthy consumers will not be able to achieve their dreams of owning a home," NAR President Ron Phipps wrote. The Mortgage Insurance Companies of America wrote in an attempt to steer private insurers somewhere into the QRM definition. The current QRM definition does not include privately insured low down payment loans. MICA tapped Milliman, an insurance consulting firm, to perform a study. It found that mortgages underwritten with private mortgage insurance showed lower default rates. The trade group then suggested raising the QRM maximum LTV ratio from 80% to 97%. "Congress intended for private mortgage insurance to play a role in the housing finance system within the structure of the QRM definition; and the data unequivocally supports the essential role of private MI in contributing to overall performance of low down payment mortgage loans," MICA Executive Vice President Suzanne Hutchinson wrote. The American Land Title Association also looked for a way into the QRM definition. "Obtaining a title insurance commitment will provide lenders a more complete picture of the borrower's debt by showing debts tied to the collateral's title that cannot be found in a credit report," ALTA wrote. Community banks also weighed in with last minute lobbying efforts. The Independent Community Bankers of America complained risk retention "over-regulates" the market "to the point of choking off the flow of credit." "The serious contraction that would occur in the mortgage market would significantly limit credit availability. It’s ironic that the lenders that would remain would be those that played a role in the housing crisis through lax underwriting standards and predatory practices — while community banks that did not contribute to the disaster would be forced out," the ICBA wrote. Write to Jon Prior. Follow him on Twitter @JonAPrior.