Proposed Risk Retention Reform Affects Banker and Broker Loan Pricing

The Mortgage Bankers Association (MBA) expressed qualified approval today for the Senate's passage of the Restoring American Financial Stability Act of 2010.  The Senate voted closure on the bill mid-afternoon on Thursday and almost immediately passed it on a 59 to 39 vote, mostly on party lines.  Four Republicans voted for the measure.  The bill must now be reconciled with a measure passed earlier by the House.

While MBA said that passage of the bill was an important milestone toward a more efficient regulatory regime for the financial services industry, it expressed concerns about several components of the legislation.  Chief among those concerns is the proposed risk retention part of the bill in which lenders would be required to retain a minimum of 5 percent ownership of any loan it originates, sells, or securitizes. MBA has strongly supported an exemption for all conventional lending done according Freddie Mac and Fannie Mae standards, especially those loans made under government guarantee. 

The Senate included some exemptions in its version, the House did not.

Robert E. Story, Chairman of the MBA said of the reconciliation process, “Of particular importance to us is ensuring that the final language on risk retention does not discourage prudent, responsible lending.  If not, we risk doing long-term damage to our single-family, multifamily and commercial real estate markets. The Senate made important progress by creating a qualified mortgage exemption for lower-risk single-family mortgages from the additional risk retention the bill proposes.  This approach will allow lenders to make prudent, responsible loans to well-qualified borrowers and help facilitate a quicker recovery of the housing market.”

Story said his group was also pleased that the Senate recognized that risk retention can take various forms in commercial and multifamily loans including reps and warranties and first loss positions.  The Senate bill gives greater guidance, he said, to the regulators who will write the risk retention rules under the new law. 

The MBA statement said it believed that reconciliation of the House and Senate versions of the bill would best be achieved if Congress convened a formal conference committee, something the New York Times reported is being considered and may be televised.

Story said that the final bill could be further improved by creating one consistent standard for the purpose of regulating residential mortgages.  “If legislators insist on moving forward with mandating additional risk retention, setting credit criteria, and restricting certain loan products and features, they should use one consistent standard that works across the board to identify what is and what is not subject to the new rules.”

Risk retention legislation will affect mortgage loan pricing in a negative way. It will force mortgage bankers and wholesalers to accumulate more reserve funds on their balance to remain in compliance with retained risks regs. The easiest way to accumulate these “reserve funds” is by passing the cost down to consumers via more margin in rate sheets.

Plain and Simple:  Lenders will be forced to “bake” more basis points into loan pricing. Mortgage rates will move higher relative to MBS prices. Primary/Secondary spreads would widen.

If you are a mortgage broker, this affects you too. Mortgage brokers sell loans to wholesale lenders who originate, sell, and sometimes even securitize loans. These wholesale lenders will be subject to new regulations. They too will be forced to offset rising reserve fund costs via add profit margins in rate sheets. The entire industry needs to be upset about this one…

P.S. I am a big supporter of bringing more “standardization” into the mortgage industry

I suppose this is another “call to action”. Get on the phone with your Congressman please.

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