Risk Retention Regs Boost Mega-Bank Market Share

Debate continues over including a 20 percent down payment requirement in new regulationsrndefining “Qualified Residential Mortgages” (QRMs) under the Dodd-Frank WallrnStreet Reform and Consumer Protection Act. rnA QRM would be exempted from the rule requiring lenders to retain a 5 percentrninterest in each mortgage it securitizes; a policy called “riskrnretention.“</p

The Community Mortgage Banking Project (CMBP) released a reportrnThursday criticizing such a down payment requirement because, among otherrnreasons, it would be good for mega banks. rnAnd how do we know the report asked; because Jamie Dimon told us so! Dimon, CEO of JP Morgan Bank was quoted in arnrecent report from Citigroup as saying that such a requirement couldrnultimately end up as a positive for the larger players such as JP Morgan andrnWells Fargo given they have the scale to hold the 5 percent of non-qualifyingrnmortgage on their balance sheet.</p

Glen Corso, managing director of the CMBP said “Today,rnthe three largest banks – JP Morgan, Wells Fargo and Bank America – account forrnmore than half of the mortgage lending in the country.  A 20 percent down payment requirement as partrnof the QRM will simply accelerate that concentration while making loans morernexpensive for responsible borrowers. rnThis is not what the Dodd-Frank Act reforms were supposed to do.”</p

As evidence of that claim, CMBP referenced a letter sent in Februaryrnfrom three of the senators responsible for the QRM exemption language, SenatorsrnKay Hagen (D-NC), Mary L. Landrieu (D-LA) and Johnny Isakson (R-GA) wrote to sixrnregulators responsible for formulating the QFM regulations including the Chairrnof the Federal Reserve, and heads of the Department of Housing and UrbanrnDevelopment, Federal Housing Finance Agency, and Federal Deposit InsurancernCorporation.  The letter expressed concernrnthat a number of issues outside of the legislative scope and intent of the riskrnretention rules might unnecessarily slow the rulemaking process.</p

The letter directly addressed a high down paymentrnrequirement for any mortgage to meet the QRM exemption saying it would bern”inconsistent with our legislative intent. rnAs the authors of the QRM provision, we can assure you that, althoughrnthere was discussion about whether the QRM should have a minimum down payment,rnin negotiations during the drafting of our provision we intentionally omittedrnsuch a requirement.</p

The letter said that the purpose of the QRM is to create arnrobust underwriting framework to attract private capital.  “We recognized the importance ofrnestablishing a framework that would allow creditworthy first-time homebuyers tornhave access to the benefits of loans meeting the QRM standard.  We also recognized that homeowners in thernhardest hit housing markets have lost extraordinary amounts of equity as resultrn(sic) of plummeting home prices.  For allrnof these families, a high down payment is simply out of reach.  A QRM with a high down payment requirementrnwould force them to postpone buying or refinancing a home for years, or to takernon mortgages at much higher interest rates.”</p

The CMBP paper said an analysis of 33 million home loansrnwritten between 2002 and 2008 found that boosting down payments in 5 percentrnincrements had only a minor impact on default rates.  For example, increasing a 5 percent downrnpayment to 10 percent, all other things being equal, reduced defaults by anrnaverage of only two to- three-tenths of a percent but eliminates between 7 andrn15 percent of potential borrowers from eligibility for a loan.  Increasing it to 20 percent would knock outrnanother 20 to 25 percent of borrowers while improving the default rate by onlyrnabout eight-tenths of a percent.

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