If Risk Retention Stays, a 300 BP Spike in Rates?

WASHINGTON-As momentum builds for passing regulatory reform this year, mortgage industry officials are urgently concerned that the risk retention provisions could doom a revival of the private-label MBS market.

Moreover, a new study suggests that if the risk language remains unchanged from its current form, mortgage rates could spike by 300 basis points, which would destroy the nascent recovery in housing.

The reform bill approved by the Senate Banking Committee requires issuers of MBS to retain 5% of the credit risk. Industry groups contend this is too high and the bill does not specifically direct federal regulators to make exceptions for traditional 30-year fixed mortgages and other low risk loans.

Unless amended, it could even curtail securitizations of Federal Housing Administration and Department of Veterans guaranteed loans. So far, it has been difficult to get committee chairman Christopher Dodd, D-Conn., and his staff to accommodate industry concerns.

Most senators and congressmen support risk retention as a way to prevent another subprime meltdown. It forces lenders and securitizers to have "skin the game" so they won't make loans that homebuyers can't afford. Dodd also is under pressure from the Treasury Department to impose a strong risk retention requirement on MBS.

"Right now the dialogue doesn't seem constructive," one trade group official who is lobbying on risk retention told Mortgage Servicing News. If the Dodd bill is passed in its current form, "there will be no new securities," he warned.

A JPMorgan Chase study estimates the risk retention provision in the Dodd bill could potentially push up mortgage rates by 300 basis points. "Today's 5% mortgages could become 8% mortgages," according to the Community Mortgage Banking Project managing director Glen Corso.

"Across-the-board risk retention requirements will push mortgage costs higher for everyone, even borrowers with responsible credit histories seeking safe, stable mortgage products," Corso says in a letter to Banking Committee leaders.

Financial services reform gained traction in the Senate last week as the Banking Committee passed Dodd's bill on a party line vote of 13-10 last Monday.

All of the Republicans voted against passage of the 1,300-page bill. But Sen. Shelby, R-Ala., pledged to work with Sen. Dodd on a possible compromise before it hits the Senate floor. A few days later, President Obama invited Sen. Dodd and House Financial Services Committee chairman Barney Frank, D-Mass., to the White House to stress the need for financial reform legislation.

Dodd said he would move his bill to the Senate floor in late April after Congress returns from its two-week spring recess. The two chairmen also directed their staff to begin the process of melding provisions of the Senate bill with the House-passed bill. This process will force the lawmakers to consider changes to risk retention.

The financial regulatory reform bill (H.R. 4173) the House passed in December requires 5% risk retention. However, the Wall Street Reform and Consumer Protection Act totally exempts loans guaranteed by VA and the Rural Housing Service.

The Mortgage Bankers Association and other industry groups were disappointed that the House didn't go further and exempt FHA, Fannie Mae and Freddie Mac loans.

Industry groups were hoping the Senate would be more receptive to those exemptions. But it didn't turn out that way.

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