Industry Prepares for Markup of Mortgage Reform Bill

The House Financial Services Committee is scheduled to mark up a mortgage reform bill next week and industry groups are lobbying to reduce the amount of credit risk they would have to retain when selling or securitizing single-family loans. The bill (H.R. 1728) drafted by committee chairman Barney Frank, D- Mass., requires lenders to absorb 5% of the first loss on most loans that are not prime 30-year fixed-rate mortgages. As an alternative, the Financial Services Roundtable has proposed that lenders and investors (assignee) share pro-rata in the losses. If defaults lead to a $100 loss, the lenders would incur a 5% or $5 loss and the mortgage-back securities investor would incur a $95 loss. "This ensures the lender will continue to have some 'skin in the game,' without having the unintended consequence of significantly reducing mortgage availability," FSR Housing Policy Council president John Dalton told the committee during a hearing on H.R. 1728. Roundtable officials say they are open to other risk retentions proposals that would reduce the impact on capital. Mr. Dalton also suggested that the retention requirement expire after 18 months. This would provide protection against early defaults and "avoid excessive buildup of capital depleting positions," he testified. The committee is scheduled to begin the markup on Tuesday (April 28).