Depending on who you talk to, the mortgage risk retention proposal unveiled Tuesday will either restore sensible standards to the residential market, or result in a significant credit crunch.
Even before the plan was officially published, regulators were in something of a defensive crouch, emphasizing that an exception to the new standards — for so-called qualifying residential mortgages — was narrowly crafted on purpose and is not designed to capture most mortgages.
"It's important for people to understand that the QRM rule is going to be a small slice of the market," Federal Deposit Insurance Corp. Chairman Sheila Bair told reporters. "It doesn't mean everybody is going to have to comply with these standards with a mortgage going forward."
But plenty of others were unconvinced. They argued that the QRM criteria, which would force borrowers to make a 20% down payment and comply with income, debt and credit history requirements, are so narrow that the plan would significantly curtail lending. Sen. Kay Hagan, D-N.C., who drafted the risk-retention provision in the Dodd-Frank Act, said the plan looked inflexible.
"The 20% downpayment looks to me as to be too rigid and it would unnecessarily prevent the middle-class, first-time homebuyers from being able to get an affordable mortgage," Hagan said in an interview.
Analysts agreed. While regulators may not be intending to set national underwriting standards, analysts said, the QRM effectively does so — and would prevent many borrowers from getting a loan. "Fundamentally with a 20% downpayment unless you're rich, have a high income or have rich parents, it's going to be a major hurdle," said Brian Chappelle, a partner at the Washington consulting firm Potomac Partners. "We haven't gotten a housing recovery in place yet. By imposing these additional restrictions, I think it actually creates more risk for the government."
Industry representatives said there would be dire consequences if the risk-retention plan is not changed before it is finalized.
"This rule potentially has a disastrous impact on the market," said Robert Davis, executive vice president of government relations for the American Bankers Association. "This will require risk retention for a large percentage of mortgages. I've already had email replies from bankers about how much this will curtail their lending if this goes into effect."
