Lawmakers from both political parties sharply criticized the banking regulators on Thursday for their risk-retention proposal, arguing it will lead to a credit crunch.
Members of the House Financial Services capital markets subcommittee focused mostly on the plan's definition of "qualifying residential mortgages," which are exempt from the risk-retention requirements but must meet strict underwriting criteria, including a 20% downpayment by borrowers. While regulators maintain that QRM loans are meant to be a small slice of the market, lawmakers said the result could be a loss of access to credit for worthy borrowers and a concentration of lending power at the largest banks.
"Before the crisis we were over here with very lax standards … and now we've gone over here where it's become very difficult to get a loan," said Rep. Carolyn Maloney, D-N.Y. "Many people are questioning the 20% down in the draft rule."
Lawmakers also complained about the inclusion of limited servicing standards in the risk-retention plan and an exemption for Fannie Mae and Freddie Mac while they are in conservatorship.
"There are aspects of the rule that I think raise questions and concerns," said House Financial Services Committee Chairman Spencer Bachus. "For example, the regulators have proposed extraneous issues which are beyond the scope of the Dodd-Frank Act, including mortgage servicing standards, as part of the risk-retention requirement. Also, the broad exemption provided to loans purchased by Fannie and Freddie. I think it's problematic."
Top Democrats also took issue with the exemption for the government-sponsored enterprises.
"I agree that we should not be exempting Fannie Mae and Freddie Mac from the legislation," said Rep. Barney Frank, the full panel's ranking member.
Others worried about the potential competitive impact of the plan. Rep. Brad Sherman, D-Calif., said community banks would not be able to offer non-QRM mortgages, leaving the market dominated by the largest banks.
"The larger banks would have the capacity to make non-QRM loans, while the community banks with a higher cost of funds will not be able to do so at a cost effective and competitive rate," Sherman said. "One of the consequences of a narrow QRM standard may be to force community banks to become agents or supplements to the larger institutions."
Under a proposal released March 29, lenders must retain 5% of the risk of a loan they sell into a securitization unless it meets certain underwriting criteria spelled out by the banking agencies, including a 20% down payment by borrowers and compliance with certain debt-to-income ratios. Under the plan, the GSEs are exempt because they offer a 100% credit guarantee for any loan they purchase, and retain it when that loan is sold as a mortgage-backed security.
Julie Williams, first senior deputy comptroller and chief counsel for the Office of the Comptroller of the Currency, warned that forcing the GSEs to hold an extra 5% stake in MBS would, ironically, make them bigger at a time the government has said they should be wound down.
The subcommittee has already passed a bill by Rep. Scott Garrett, the panel's chairman, which would prohibit the GSEs from being exempt from the risk-retention plan.
But Scott Alvarez, general counsel of the Federal Reserve, said forcing the GSEs to follow risk retention would not be beneficial. Lawmakers also pushed regulators to lower the 20% downpayment requirement. Even the acting commissioner of the Federal Housing Administration, Bob Ryan, said the requirement could cut off access to credit.
But Michael Krimminger, the general counsel of the Federal Deposit Insurance Corp., defended the requirement.
"The agencies' analysis of the data show, historically, that loans with the high standards chosen for QRM loans had lower rates of default," he said. "In fact, many of the underwriting standards proposed for the QRM loans precisely address the layered risks that were often ignored during the housing boom that led to increasingly higher delinquencies as housing prices declined."
Krimminger emphasized that the QRM criteria were not intended to become the standard for the entire market.
