by Adam Tempkin
NEW YORK, June 7 (IFR) - Last week's intense backlash
against U.S. regulators' proposed risk retention requirements
for residential mortgage-backed securities (RMBS) united an
unusual group, namely mortgage bankers, consumer advocates and
nearly 200 elected officials.
The furore has left commentators wondering whether anyone,
even a member of the government, was still willing to defend
the proposal to instill lending accountability in the form it
was originally written.
The original deadline for market feedback and commentary on
risk retention rules and the related carve-out for ultra-safe
"qualified residential mortgages" (QRMs) was this Friday, but
has now been extended until Aug 1.
The debate unleashed a formidable, outspoken lobby of
mortgage and banking trade groups, consumer activists, and
dozens of members of Congress strongly opposed to the
But amid the outcry, the voices of those who support the
proposed rule going ahead in its current state were curiously
missing; in fact, the silence was deafening -- especially from
the regulators that crafted the proposal.
Some market experts were either perplexed by the baffling
alliance of bankers, consumer groups, and politicians --
insisting that their claims were often exaggerated -- or else
they believed that the protesters were misinterpreting the QRM
proposal and avoiding the real issue at hand: what will the
future of US housing finance look like?
"These histrionics are way out of line," said Dean Baker,
economist and co-director of the Center for Economic and Policy
Research in Washington, DC, referring to the pushback from the
anti-risk retention lobby over the last several weeks.
"When risk retention was first discussed, it was proposed
in the 10% to 20% range, and then it went down to 5%. That is a
relatively small stake in the scheme of things. What you could
have ended up with could have been more restrictive; [these
groups] are just pushing back because they can."
At a press conference last Thursday, members of groups as
diverse as the Mortgage Bankers Association (MBA), Center for
Responsible Lending, National Community Reinvestment Coalition,
and the Consumer Federation of America joined forces in a rare
display of solidarity to convey the message that the proposed
risk retention regulations will irreversibly reduce credit
options, even for qualified borrowers.
"We believe that the proposed rule implementing these
provisions goes beyond what Congress intended and would
drastically limit affordable mortgage financing options for
moderate-income families, first-time borrowers, minorities, and
many others," said a brochure distributed by the collective
Moreover, in the past two weeks, more than 160 bipartisan
lawmakers from the House of Representatives, and separately,
nearly 40 Senators, wrote to regulators (including the FDIC,
Federal Reserve Board, and Department of Housing and Urban
Development) urging a dilution of the risk retention rule and
broadening of the QRM definition to avoid constricting access
to credit and impeding the housing market's recovery.
The problem, they say, is that QRMs -- or the very safest
mortgages exempted from the risk retention rule -- will demand
a 20% down payment from borrowers. According to critics, this
proposed down payment, as well as prescribed loan-to-value and
debt-to-income requirements, is unnecessary and "not worth the
societal cost of excluding far too many borrowers from the most
affordable loans", according to the MBA.
Baker noted that as a result of risk retention, borrowers
would have to pay only about one-tenth of a percentage point
higher interest, "if even that", he said. "It seems crazy to
me. Banks are convinced that this is going to be a horrible
thing, but it's not as if [issuers] will be holding on to the
5% and putting it under their mattress: they will have interest
payments on that," he added.
But both sides of this debate may be missing the point,
says Michael Barr, a professor at University of Michigan Law
School and former Assistant Secretary for Financial
Institutions of the US Treasury Department, who helped to
develop and pass the Dodd-Frank Act.
"The real question is, 'will there be government-guaranteed
mortgages or not?'," he said. The answer to that will drive the
cost and structure of the system.
"If not, it means much higher cost for mortgages, a shift
away from 30-year fixed-rate to short-term adjustable-rate
mortgages, as well as much more bank balance sheet lending and
less securitization, and more concentration in mortgage
"But I don't think that regulators [in the draft rule]
intended the QRM to be what a 'conforming mortgage' would look
like in the future."
So-called conforming mortgages, according to Barr, are
mainstream mortgages that are now guaranteed by Fannie Mae and
Freddie Mac, but don't involve a blanket rule of 20% down
The GSEs still finance more than 90% of the mortgages in
the country, so the risk retention rules won't have much of a
short-term impact; but in the long term, as Fannie and Freddie
are wound down, it's not clear whether there will be another
method for guaranteeing these conforming loans.
In Barr's view, the proposed QRM is an extremely narrow
exception to the risk retention rule, and not the "gold
standard" for what a typical conforming mortgage would look
However, Barr admits that if the requirements for
conventional conforming mortgages -- something akin to Freddie
Mac and Fannie Mae-eligible mortgages in the past -- require a
20% down payment, and people begin to think of the
current-draft definition of QRMs as conforming mortgages, "then
yes, there is a real risk of knocking a lot of [borrowers] out
of the mortgage market", he said.
The debate about whether 5% risk retention is appropriate
seems to have only just begun given the new deadline for
"Assuming there is a profitable business opportunity
presented in the context of the 5% risk retention requirement,
I think that large money-centered banks will be more likely to
take advantage of that opportunity, but for smaller banks, it
will be a real cost," said Patrick Dolan, a partner at Dechert
Some critics say that risk retention is not needed at all,
and that increased transparency is the only thing that might
have helped to avoid the crisis. But the clamor for reversing
the proposal made some wonder whether the reason for imposing a
strict risk-retention rule in the first place has now been
"What we saw in the financial system was a breakdown in
standards for securitization driven by the misalignment of
incentives," said Professor Barr. "Increased transparency is an
important corrective, but if incentives are still out of line,
transparency won't be enough to correct the market."
(Adam Tempkin is a senior IFR analyst; Tel: 1-646-223-8841)