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Risk retention may slow return of private-label mortgage finance

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Banking executives believe private capital will rebuild the mortgage finance market, but don't expect non-agency funding to flood the market anytime soon, according to panelists at Standard & Poor's recent "Housing Summit: Boom, Bust and Beyond." One of the challenges to restarting the capital markets is the risk-retention rule, they said, which requires lenders hold at least 5% of any loan not designated as a qualified residential mortgage. The current proposed definition of a QRM is a loan where a borrower makes at least a 20% down payment and meets other underwriting guidelines. "Risk retention is a healthy thing and might be absolutely vital for the return of private capital," Anthony "Tuck" Reed, senior vice president of Capital Markets, said at the S&P conference. "But it will require a lot more capital to get the private-label housing finance market back on track. The challenge is enormous, but it is manageable because we have the time and the tools to approach problems that will break the paralysis we are in today." Erkan Erturk, senior director of structured finance at S&P, expects housing reform to "likely proceed at a slow pace." "In the long run, the market for private-label RMBS could be much smaller," Erturk said. "But stricter underwriting guidelines could bring the focus to more prime products." One panel at the S&P housing summit attempted to allay some concerns of industry players who fear the loss of 30-year, fixed-rate mortgages. "While there will be some hybrid loan products on offer and higher rates will prevail, the 30-year, fixed-rate mortgage looks like it's here to stay," said Robert Partlow, senior vice president of the consumer bank portfolio for SunTrust Banks Inc. (STI). Write to Kerri Panchuk.

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