The Securities and Exchange Commission approved the final risk retention rule by a vote of 3-2 on Wednesday. Now all that is left is approval from the Federal Reserve
The final rule becomes effective one year following its publication in the Federal Register for residential mortgages and two years following publication for all other asset classes, Bank of America Merrill Lynch (BAC) said.
On Tuesday, the Federal Deposit Insurance Corporation issued the final version of the rule that would require banks to retain at least 5% of the risk on their books when securitizing loans.
The rule contains an exemption for Qualified Mortgages similar to when the rule was proposed in 2013, along with a requirement for a periodic review of the definition and parameters for QM.
“Finalizing this rule represents a major step forward to providing greater certainty to the housing finance market and paves the way for increased participation by the private sector,” Federal Housing Finance Agency Director Mel Watt said Tuesday morning.
And the majority of the industry agrees with this.
“The final ‘qualified residential mortgage’ rule will provide much-needed certainty for the mortgage market. By aligning the Qualified Residential Mortgage rule with the ‘qualified mortgage’ or QM rule, the regulators have wisely endorsed an approach that avoids unnecessary complexity and will encourage greater participation in the market by risk-bearing private capital,” Former Secretary Henry Cisneros and former Senator Mel Martinez, co-chairs of the Bipartisan Policy Center’s Housing Commission, said.
“We are also pleased that the final QRM rule refrains from imposing excessively high down payment requirements that would have been a significant obstacle to homeownership for potentially millions of creditworthy families,” they both added.
National Community Reinvestment Coalition President and CEO John Taylor reaffirmed that saying, “We are pleased that regulators have aligned the definition of QRM with the definition of QM, and that the final rule does not include the previously proposed 20% down payment requirement and credit score criteria for borrowers. Those requirements would have needlessly excluded creditworthy borrowers from the mortgage market. The final rule will help to ensure safe and sound lending and prevent unsustainable, risky loans.”
But not everyone is onboard with the new rule.
“Dodd-Frank gave regulators 270 days to prescribe regulations on risk retention, and three and a half years later those regulators are still struggling to get their act together while the housing market limps along and private capital sits on the sidelines. This rule is one more reason why Washington bureaucrats shouldn’t be picking winners and losers in the housing finance market. If risk retention is a good idea, it should be something that the market establishes, not that the government mandates,” Financial Services Committee Chairman Jeb Hensarling, R-Texas, said.
“More convoluted top-down regulations from Washington aren’t going to build the sustainable housing finance system that helps Americans buy homes they can actually afford to keep,” he added.
Instead, Hensarling suggests that the better solution is to repeal the Dodd-Frank Act’s risk retention provision, end the federal government’s domination of the housing finance market, and put private capital at the center of the mortgage system, which is exactly what the PATH Act does.