The Dodd-Frank Act is among other things stifling stated government goals to fund more residential mortgages through the private market, American Securitization Forum executive director Tom Deutsch told the House Committee on Financial Services in prepared testimony Tuesday.
“Market participants aren’t investing in building platforms. Rather, they’re putting their skeletal platforms in the deep freeze, particularly for RMBS, because of the tremendous uncertainty of the outcome of proposed rules that could very well make those business lines loss centers,” Deutsch said in testimony prepared for the committee’s hearing on Dodd-Frank’s impact.
“As a result, significant brain drain out of private-label RMBS specialists continues to occur, making the Administration’s and Congress’ desire to bring private capital back into mortgage securitizations more difficult and more protracted,” he added, respectively citing aims stated in the February 2011 HUD/Treasury report to congress on reforming U.S. housing finance markets, and in House and Senate bills with similar goals.
Deutsch reiterated among other things long-held ASF views that certain aspects of Dodd-Frank such as the premium capture reserve account “are so lethal to the RMBS and CMBS markets that those markets are predicted to be relegated to the history books for all but extremely limited segments of the market, if that rule were to be put in place as proposed.
“The potential impact of such a rule on borrowers would be substantial, with interest rates having to rise multiple percentage points and rate locks effectively being prevented,” he said, citing potential effects of the premium capture that regulators have proposed beyond the 5% risk retention originally in Dodd-Frank.
Deutsch cited estimates by Moody’s Analytics chief economist Mark Zandi showing mortgage rates could increase one to four percentage points as a result of the premium capture reserve account proposal in its current form, which would lock up returns and origination expenses for the life of a securitization, require accounting consolidation on the securitizer’s balance sheet as well as interfere with rate locks.
Deutsch also noted securitization market concerns about the multiple layers of cost the proposed rulemaking puts on both primary and secondary markets, citing Dodd-Frank’s impact on mortgages as an example.
Among specifics, Deutsch cited the potential costs of liability in a requirement for mortgage lenders “to make a determination that borrowers have a reasonable ability to repay.” He noted the “safe harbor” from liability that the proposed “qualified mortgage” definition aims to provide “unfortunately” appears instead to be shaping up as a “subjective standard” with a “rebuttable presumption of compliance that will result in frivolous lawsuits costing anywhere from $70,000 to $100,000 to defend,” according to research by Amherst Mortgage.
He said this would create a risk premium for low and moderate-income borrowers the law aims to protect.
His testimony indicates market participants remain critical of intended relief in this area as proposed in the form of the qualified residential mortgage definition aimed at lessening certain loans’ risk-retention burdens, indicating it is too “tight” for most loans to meet. Deutsch cites April 2011 Federal Housing Finance Agency research showing 19.8% of loans conventional government-sponsored enterprise loans originated between 1997-2009 (a period that spans both very tight and very loose underwriting) would meet the current definition.
He said the ASF also is still “concerned that the very conservative terms of the proposed QRM definition, taken together with the risk retention requirements, will provide a significant and undue competitive advantage to the GSEs, which are exempt from the risk retention requirements.”
Deutsch suggested that the QRM definition be broadened to include a majority of loans made to borrowers with “prime” credit profiles and the private market be put on a level playing field with the GSE in regard to risk retention.
