Several mortgage trade groups have voiced their opposition to a risk-retention provision that the House Financial Services Committee included in its Financial Stability Improvement Act (FISA) draft legislation, which is designed to address ‘too big to fail’ financial institutions.
According to a committee statement on the draft legislation released last week, the bill would direct federal banking regulators and the Securities and Exchange Commission to jointly write rules requiring creditors to retain 10% or more of the credit risk associated with any loans that are transferred or sold. With regard to the securitization of assets that are not originated by creditors, the FISA draft would require securitizers to retain the risk.
But trade groups say the risk-retention component could unintentionally hinder competition and raise costs for borrowers. The Community Mortgage Banking Project (CMBP) and the Community Mortgage Lenders of America (CMLA) issued a joint statement Friday expressing concern that the House committee's draft legislation would have a "devastatingly adverse impact on the secondary market."
‘By setting risk-retention requirements at each step of the process – from sale to securitization – and layering it over multiple years of originations, the cumulative impact of these requirements on lenders and issuers will reduce liquidity significantly and undermine the ability of the secondary mortgage market to deliver hundreds of billions of dollars of low-cost mortgage credit needed each year," the joint statement said.
The groups argue the impact would be "particularly severe" for local lenders, which account for more than 40% of all originations and about half of all Federal Housing Administration loans. The local lenders, the CMBP and CMLA say, are not built to retain such layers of credit risk over multiple origination cycles.
The Mortgage Bankers Association spoke out on the subject Monday in a letter to the House committee's chair and ranking member, Rep. Barney Frank, D-Mass., and Rep. Spencer Bachus, R-Ala., respectively.
The letter, signed by MBA President and CEO John Courson, points out that creditors and securitizers will be subject to risk retention under provisions of legislation passed by the House earlier this year. Frank has indicated that that bill, the Mortgage Reform and Anti-Predatory Lending Act (H.R.1728), will be folded into the larger financial regulatory reform package moving through the chamber this fall.
"To avoid the prospect of creditors and securitizers being forced to comply with two conflicting provisions, we urge you to revise the FSIA to exclude risk-retention requirements for creditors and securitizers of residential loans, and instead, subject them to the provisions of H.R.1728," Courson wrote.
In their statement, the CMBP and CMLA also referenced H.R.1728, calling it a "more sensible compromise on this issue."
All three groups landed on one conclusion: that FISA, if passed with the 10% risk-retention provision, would push small mortgage companies out of business and constrain larger institutions' lending.
The MBA added that the draft legislation would dampen the recovery of the commercial real estate market. Though lawmakers' intention with the bill is to force lenders to have skin in the game, thereby reducing the likelihood that lenders will make unsustainable loans, commercial deals are business-to-business in nature, thus negating the need for consumer protection provisions, the MBA says.