WASHINGTON—Federal regulators are facing a lot of pressure from Congress and industry groups to revise their risk retention proposal.
At a recent congressional hearing, both Republicans and Democrats were critical of the proposal that requires a 20% downpayment on “qualified residential mortgages.”
Single-family loans that meet the QRM test are exempt from the 5% risk retention mandated by the Dodd-Frank Act.
Industry groups complain the downpayment requirement does not allow private mortgage insurance to compensate for lower downpayments.
The proposed rule also exempts Fannie Mae and Freddie Mac from retaining 5% of the credit risk on non-QRM loans they securitize.
The regulators made this decision to prevent possible disruption to the supply of mortgage credit, which would push more borrowers into FHA-insured loans.
However, this decision has roiled many in Congress.
The Dodd-Frank Act specifically exempts Federal Housing Administration and Department of Veterans Affairs guaranteed loans from risk retention, but not GSE guaranteed mortgage-backed securities, Rep. Scott Garrett, R-N.J., pointed out during an April 14 hearing.
The Capital Markets and GSE subcommittee chairman stressed that the regulators disregarded congressional intent in granting the GSEs an exemption.
“This will severely hinder efforts by the [Obama] administration and Congress to encourage more private capital in our mortgage markets,” Rep. Garrett said.
And he stressed that the members of the House Financial Services Committee want the GSEs and the private sector treated equally under risk retention.
In this case, the regulators should recognize that they “need to alter the rule and follow the clear intention of Dodd-Frank on this topic,” the New Jersey congressman told the regulators.
The regulators also got some push back from the chief congressional proponent of risk retention.
Rep. Barney Frank, D-Mass., said the regulators have set the downpayment requirement on qualified residential mortgages too high.
“I am persuaded by a number of people that 20% is too high a number,” he said at the subcommittee hearing.
As chairman of the House Financial Services Committee last year, Rep, Frank pushed for a 5% risk retention requirement as a way to prevent securitizers from packing risky loans into mortgage-backed securities. Congress approved his risk retention provision as part of a financial services reform bill that became known as the Dodd-Frank Act.
At a hearing, Rep. Frank said mortgages with lower downpayments and solid underwriting standards should be able to meet the QRM test and be exempt from risk retention.
His statement cheered the Mortgage Bankers Association and other industry critics of the regulators proposal.
North Carolina mortgage banker Henry Cunningham testified that the 20% downpayment and qualifying ratio requirements are unduly restrictive.
“We ran an analysis on our 2010 book of business and 58% of our purchase loans and 74% of our refinances would not meet the QRM standards. This is astonishing because 97% of our mortgages were fixed rate,” he said.
On behalf of MBA, Cunningham urged the regulators to extend the June 10 comment period on the rule so they have time to revise and redraft the rule.
But congressman Frank’s remarks were disappointing to supporters of private mortgage insurance.
The ranking committee Democrat noted that private MI is not a “relevant factor” in terms of lowering default risk. “It doesn’t discourage people from making bad loans,” Rep. Frank said.
Genworth Financial president and chief executive Kevin Schneider disagreed and testified that loans with mortgage insurance perform better than those without MI.
“In fact, with all other characteristics being equal, insured mortgage become delinquent 32% less than comparable uninsured loans,” Schneider testified.
The Genworth CEO also warned that virtually all low-downpayment lending will shift to FHA unless private MI is given parity with government MI.
Meanwhile, officials from the Office of the Comptroller of the Currency and Federal Housing Administration indicated their agencies are open to lowering the downpayment and they will be looking forward to reviewing the comment letters on the risk retention rule.
FHA is concerned the 20% is “too high,” acting FHA commissioner Bob Ryan said.
He expressed interest in reviewing the comment letters that show the “performance benefits” of moving the downpayment requirement down to 10%.
