With the housing finance market so dependent on government-backed mortgages, federal regulators -- with the blessing of the Treasury Department -- have decided to exempt Fannie Mae and Freddie Mac-issued bonds from the new risk retention rules.
The decision means that any MBS – even product backed by high LTV collateral written with mortgage insurance -- issued while the two are in conservatorship will be exempt.
Banking regulators are moving toward a narrow definition for "qualified residential mortgages" that would force securitizers to retain 5% of the credit risk if the loan does not meet a 20% downpayment requirement.
The regulators consider a 20% downpayment with no mortgage insurance to be a good QRM standard for the private securitization market once it gets going again.
But right now, the private mortgage securitization market is nearly non-existent. If the two GSEs were not exempt from the risk retention rules, that could potentially snuff out both the high LTV market and the mortgage insurance industry.
Treasury secretary Timothy Geithner told a congressional panel recently that his department is coordinating implementation of the risk retention rule and other Dodd Frank Act provisions. "We want to implement its provisions in a thoughtful manner to protect borrowers and promote stability across the housing finance market," Geithner said.
