WORD ON THE STREET: It is no exaggeration to say that the proposed rule on risk retention will have profound effects on our housing and real estate recovery and determine who can and cannot buy a home. It would also affect the future of the commercial real estate public debt markets for years to come. If the rule is finalized in its current form, the result will be much higher costs for the vast majority of consumers, and diminished access to credit for many others.
Let me speak first about the most controversial part of the rule: the qualified residential mortgage (QRM) exemption. Recognizing that loans subject to risk retention would carry higher costs, Congress wisely instructed regulators to exempt safer products from the requirement. While Congress left some of the key decisions to regulators, the intent was clear: to require sound underwriting and proper documentation while excluding non-traditional risky features.
Yet regulators took this authority and opted to exclude most mortgage products, making QRMs the exception instead of the rule. The Federal Housing Finance Agency reports that less than one-third of the loans purchased by Fannie and Freddie in 2009 would have met these requirements. This is all the more notable because 2009 was the most cautiously underwritten market in generations.Â
I am an independent mortgage banker operating in North Carolina – hardly the epicenter of the housing crisis. We ran an analysis on our 2010 book of business, and 58% of our purchase loans and 74% of our refinances would not have met the QRM standards. This is astonishing, because 97% of our mortgages were fixed-rate.
I have been in the mortgage business for 37 years. During this time, I've found that underwriting is an art, not a science. No single borrower characteristic will predict whether a loan will default.
Yet this rule hardwires some of the least-flexible underwriting standards any of us have ever seen. The hardest hit would be first-time home buyers, minorities, and middle-class families, for whom the down-payment requirement would be nearly insurmountable. The omission of mortgage insurance, which Congress specifically asked regulators to consider, is also troubling. And the debt-to-income ratios may exclude even more qualified borrowers than the down-payment requirement would.
The proposal raises several other major concerns. For instance, it is not clear if the regulators reflected on the relationship between the QRM and Federal Housing Administration's (FHA) significantly lower 3.5% down-payment requirement. The administration's recent government-sponsored enterprise white paper professed a preference for reducing the government's footprint in housing finance and paving the way for a robust private mortgage market. The obvious contradiction between the QRM and FHA requirements will force more borrowers to seek FHA loans and takes us in the opposite direction.
Another controversial piece of this rule is the national servicing standards. If ever there was a regulatory overreach, this is it. Never in the yearlong debate over risk retention were servicing standards proposed or discussed. Congressional intent could not have been more clearly directed to origination practices, not servicing.
Moreover, servicing standards are currently being developed through separate regulations and will include requirements well beyond those contained in this rule. Respectfully, this is neither the time nor the place to insert these provisions.
The Mortgage Bankers Association (MBA) is also concerned that risk retention would apply for the life of the mortgage. Underwriting deficiencies typically emerge shortly after a loan is originated. Any requirement beyond this time will further constrain funds and increase costs to borrowers.
Equally important on the commercial side, the MBA believes regulators, working within the confines of the act's requirements, have worked diligently to propose rules that would support our mutual goal of a responsible and vibrant commercial mortgage-backed securities (CMBS) market. The MBA applauds the regulators for providing flexibility in the forms of risk retention and in supporting arms-length contractual agreements between issuers and originators when allocating risk.Â
However, the MBA will seek clarification – and, in some cases, modifications – of the proposed rule, such as in the case of the Premium Capture Cash Reserve Account, which, in its current form, is unworkable. MBA will work with the regulators closely to ensure rules are in place that will not hamstring the CMBS market and will facilitate a responsible and vibrant flow of capital.
So where do we go from here? Considering the gravity of this rule, the many concerns it raises and the nearly 200 questions embedded in it, the MBA believes the comment period should be extended to permit a full discussion of the rule's profound implications. We also strongly urge this rulemaking to be synchronized with Dodd-Frank's ‘Qualified Mortgage’ safe harbor.
Finally, we urge Congress to call on the regulators to recognize the enormous constraints the risk-retention rule will put on home buyers – especially the steep-down payment and debt-to-income requirements – and to come back with a more flexible approach to underwriting.
Henry V. Cunningham Jr. is president of Cunningham & Co., based in Greensboro, N.C., and chairman of the the MBA Residential Board of Governors. This article is adapted and edited from April 14 testimony delivered before the House Financial Services Committee's Subcommittee on Capital Markets and Government-Sponsored Enterprises. The full testimony is available online.
