Industry Mostly Pleased with Bill but Not All

Mortgage bankers are mostly happy with details of the financial regulatory reform bill but it all depends on which faction of the industry you belong to. Lenders that specialize in FHA, VA and high quality GSE loans appear to be the big winners because the legislation will not require MBS issuers to maintain 5% of the credit risk on their deals as long as they produce high quality loans. "It's nice to win one," said Lewis Ranieri, co-inventor of the mortgage-backed security. Ranieri, who pioneered securitization of plain vanilla residential loans 30 years ago, has been a frequent critic of Wall Street firms that took his invention and used it for subprime. Ranieri, who considers himself "pro-housing," is concerned that financial conditions in the industry could deteriorate rapidly without a viable securitization plan. The measure agreed to by House and Senate conferees could also provide a huge boost to the Federal Housing Administration which already accounts for 30% of all loan production today (compared to just 3% five years ago). Some believe FHA could be the biggest winner of them all because the agency gets a 'pass' on the qualified mortgage test. One lobbyist working on the bill predicted the measure could cause the agency's insurance volumes to boom. "We could be looking at a $500 billion year [eventually] for them," he said, requesting his name not be published because he is still lobbying. Then again, it's unclear what underwriting standards will fall into the qualified mortgage bucket. Balloon, negative amortization, and most interest-only notes will be excluded from the definition but debt-to-income ratios and verification practices must be defined by regulators and could change over time. The bill, as expected, gives little boost to a revival of the private label market, especially subprime loans. "I'm sorry, this is bad juju," said one specialty servicer and non-conforming lender based on the West Coast. "They are trying to baby proof everything. As far as I'm concerned this bill has bombed out the mortgage industry." Meanwhile, loan brokers are unhappy with the bill because it caps yield spread premiums payment at 3% though it allows for certain vendor fees to be excluded from the calculation.