The risk retention proposal will give the "too big to fail" banks a competitive advantage over smaller banks in the mortgage securitization market, according to a new report from the Amherst Securities Group.
Megabanks with origination and securitization capabilities would benefit due to the narrow exemption from risk retention as well as the flexibility regulators give securitizers in how they retain 5% of the credit risk, according to ASG analysts.
ASG believes smaller banks will turn to real estate investment trusts to securitize loans that don’t meet the 20% downpayment threshold and tight debt-to-income ratios required to be exempt from risk retention.
"In fact, these are the only partnerships that we believe can be successful” because REITS could sponsor the MBS and hold the credit risk, ASG says in its report. Nonbank broker/dealers would expect commercial banks and thrifts to retain the credit risk.
The ASG report, which is entitled "Risk Retention Requirements = Misguided," concludes that the regulators should change direction and impose more stringent risk retention requirements on MBS issuers and set up a broader definition for "qualified residential mortgages" that are exempt from risk retention.
The proposed QRM (20% downpayment and a 36% DTI ratio) is "far too restrictive and could have a detrimental impact on credit availability," ASG says.
The comment period on the risk retention proposal ends June 10. (See related story on this website.)
