A few months ago, industry groups seemed resigned that Congress might impose a 5% risk retention requirement on mortgage securitizations, but now legislation is headed for a committee markup that pushes the "skin in the game" bar to 10% which has many concerned.
"The 10% requirement is unstudied and could have a significant negative impact on mortgage finance," said Scott Talbott, a lobbyist for the Financial Services Roundtable. Talbott warned House Finance Financial Services members in his testimony that requiring lenders to retain that much credit risk would "significantly limit" their capacity to extend mortgage credit.
In May, the House passed a subprime lending bill that requires lenders that sell and securitize subprime mortgages to retain 5% of the credit risk. Industry groups thought they had achieved a workable compromise. The subprime bill (H.R. 1728), specifically exempts government guaranteed mortgages and loans purchased or securitized by Fannie Mae and Freddie Mac from the credit risk retention requirement.
The Senate has not taken any action on H.R. 1728. Financial Services Committee chairman Barney Frank, D-Mass., the primary author of H.R. 1728, did not include the exemptions in his regulatory reform bill to address systemic risk issues and "too big to fail" institutions.
Regulators can reduce the 10% retention requirement to 5% on certain mortgages under the new bill, but no lower than 5%.
"We are baffled as to why this has come back up again, since we thought it was settled in the subprime lending bill," said Glen Corso, managing director of the Community Mortgage Banking Project. Corso pointed out that the Frank bill, which has the support of the Obama administration, also imposes a credit risk retention requirement on securitizers that can be in lieu of or in addition to the lenders requirement.
"I think there will certainly be a push for some exemptions," said Bert Ely, a banking consultant.