Dodd Bill Needs More Explicit Risk Retention Exemptions for Mortgages

 

Robert E. Story, Jr., CMB, Chairman of the Mortgage Bankers Association, issued the following statement in reaction to proposed legislation to modernize regulation of the financial services industry.

“MBA supports efforts to modernize the regulatory structure for mortgage banking firms, but we are concerned that this bill could be headed down several of the same wrong paths as the legislation that moved through the House late last year.  This bill does not provide uniform national regulation of all mortgage banking firms, and thus further solidifies the patchwork of state and local laws that increase costs for borrowers and lenders alike.

“This version of the bill does move away from the "one size fits all" approach to risk retention by recognizing that certain underwriting requirements, loan types and business models are inherently low risk, and we also are pleased that the bill is cognizant of the impact of onerous risk retention requirements on the availability and cost of credit.  However, we believe the bill needs to be more explicit requiring regulators to provide specific exemptions for carefully underwritten, low-risk residential mortgages.”

“Qualified residential loans that exhibit certain characteristics – such as 30-year fixed rate, fully documented, sufficient downpayment – ought to be exempted from any risk retention requirement.  These types of loans have well known and documented risk profiles easily understood by the investor and should not require that the originator retain a portion of the loan on its books. 

“Further, it should be pointed out that residential mortgage originators, when they sell a loan into the secondary market, retain legal representations and warranties that require them to buy the loan back from the investor where there is proof that the loan was not properly underwritten.  Requiring originators – especially small, locally-based lenders – to retain a certain percentage of the loan on their books threatens the very business model that offers consumers choice and competition, and thus more affordable loans.

“MBA does not believe that a “one-size fits all” approach to risk retention recognizes the uniqueness of the various debt structures in the market place.  In order to ensure continued market recovery, we strongly urge Congress to consider the current safeguards that already exist within the commercial mortgage-backed securities (CMBS) market with regard to retaining risk.  Because mortgages secured by commercial real estate involve business-to-business transactions with sophisticated borrowers, not individual consumers, an attempt to impose such a uniform approach to risk retention in this arena can create unintended consequences and stymie further efforts toward economic recovery. 

“MBA supports workable, effective reform of regulatory oversight of financial services, and we stand willing to work with all parties to craft bipartisan solutions to some of the problems that caused the financial crisis.”