Federal regulators went beyond the requirements of the Dodd-Frank Act and inserted a provision in their risk retention proposal that will increase rates on private mortgage label mortgages and “effectively eliminate incentives to securitize,” according to the American Securitization Forum.
ASF executive director Tom Deutsch told a congressional panel this week that the 5% risk retention requirement will increase costs for mortgage borrowers. But the costs will be “prohibitive” if the final rule also requires the securitizer to maintain a “premium capture cash reserve account,” which is not required by the statute.
“In fact, Mark Zandi of Moody’s Analytics has estimated that mortgage rates would be increased by 1 to 4 percentage points if the rule is implemented as proposed,” Deutsch testified this week.
The chief economist of Moody’s Analytics told NMN the combination of risk retention and the reserve account could impact mortgage rates by up to 400 basis points.
“In all likelihood, there would be few, if any loans, originated if the rate impact is over 300 basis points. These loans would in all likelihood be unaffordable to the borrower,” Zandi said.
The Dodd-Frank Act requires an issuer of private-label securities to retain 5% of the credit risk on loans that don’t meet the standards of a “qualified residential mortgage” rule that the regulators are expected to finalize next year.
The regulators elected to include the reserve account in the QRM rule to prevent the MBS issuer from selling off the risk retention piece. Reserve accounts were common in securitizations of high-cost subprime loans because those private-label MBS structures were often over-collateralized, according to one expert. But securitizations of prime and other high quality loans generally are not overcollaterialized.
Meanwhile, Fannie Mae, Freddie Mac and Ginnie Mae are exempt from the QRM rule and risk retention.
“We are concerned that the very conservative terms of the proposed QRM rule…will provide a significant and undue competitive advantage to the GSEs,” Deutsch said.
