Mortgage lenders and consumer advocates — two lobbies usually busy opposing each other — have joined forces to urge regulators to ease up on proposed risk retention requirements, arguing they will result in a credit crunch.
The Mortgage Bankers Association (MBA) is teaming up with several groups, including the National Community Reinvestment Coalition (NCRC), Consumer Federation of America, Center for Responsible Lending and the National Housing Conference, to say in a united message that regulators took an overly narrow approach when they outlined in March which loans would be exempt from the new requirements. They are planning a joint press conference Thursday, and are also expected to meet with regulators and lawmakers to emphasize their concerns.
"We're doing briefings on the Hill and we're hoping to meet with regulators, arm in arm with consumer groups that are strongly concerned about impacts to homeownership access for moderate-income families across this country with the way rule is written," said David Stevens, MBA's chief executive, in an interview.
At issue are provisions in the Dodd-Frank Act requiring lenders to keep 5% of mortgages they securitize. Yet the law also ordered regulators to create a new class of safe loan — known as "qualified residential mortgages" — which would not have to comply.
But a wide array of Washington insiders — from senior Democratic and Republican lawmakers to banks to housing advocates — have said the proposed criteria for getting the QRM label is too tight. They say the restrictions, including a required 20% down payment and limits on a borrower's debt-to-income ratio, would unfairly subject borrowers with limited savings to higher mortgage costs. (The proposal included a comment period ending June 10, but the agencies are considering extending that to August.)
"We may have different reasons for being in this union, but I think we all have good reasons for being very concerned about what's been proposed," John Taylor, NCRC's president and chief executive officer, said of the joint effort.
"What has been proposed essentially creates a separate and unequal system of finance for people of color and for blue-collar, working-class people where regardless of your creditworthiness, of whether you're someone who has a great credit score and pays your bills on time and plays by all the rules, if you're not well-heeled enough to come up with 20% or if you're household debt to income ratios are high … you're going to go into a separate and unequal category of financing where you're going to have to pay more."
It is unclear whether the agencies will change much in the final rule. In proposing their definition for a QRM, regulators stated repeatedly that they did not intend for the exemption to be the norm in the mortgage market.
"The QRM is the exception, not the rule, and as such, I believe should be narrowly drawn," Federal Deposit Insurance Corp. Chairman Sheila Bair said at the agency's March 29 board meeting.
But since then, even lawmakers who supported the risk-retention provisions in Dodd-Frank have pushed for a broader definition. Last week, nearly 40 senators from both parties told the regulators in a letter that the 20% down payment requirement went too far, following a letter last month from House members, including one of the law's authors, Rep. Barney Frank, D-Mass.
"There is evidence that a 20% requirement does not result in sufficiently lower risk to justify the significantly enhanced hurdle to buying a home that this represents," the House members wrote in the April 15 letter.
Laurence Platt, a partner at K&L Gates, said many policymakers who supported strong retention requirements during the legislative debate are realizing the QRM could curb credit availability.
"All of Washington is suffering from risk-retention remorse," he said. "When the law was first proposed, they wanted to put an end to what they called irresponsible lending, and they thought that risk-retention and so-called 'skin-in-the-game' was a way to do that. Now that they actually have to try it on for size, I think they're realizing that you can still have responsible lending and make loans to borrowers without a lot of liquid assets."
Both Stevens and Taylor said they prefer a rule without hard limits for debt-to-income and loan-to-value ratios. In addition to no more than an 80% LTV, the proposal would limit front-end DTI ratios to 28%, and back-end DTI ratios to 36%.
"DTI and LTV have very significant societal impacts. They draw boundaries along income and ethnicity that I'm very concerned about if the final rule goes forward as is," said Stevens.
"At a time when the administration and regulators are actively trying to find ways to get private capital to reengage in the market, this is going to have the exact opposite effect."
Stevens, who recently joined the MBA after heading up the Federal Housing Administration, said he hopes regulators will rethink their position.
"I believe the regulators are thoughtful," he said. "I think they're seriously concerned about getting this right. In the effort to meet an arbitrary timeline for such a complex rule I think they perhaps were pressured to put something out into the market for notice and comment without having the chance to fully recognize and identify the real risks associated with the way the rule is drafted."
Taylor said lowering the down payment requirement would be "helpful," but it would still force responsible borrowers with good credit histories into costlier loan options.
"If you have a credit score of 720 and you're a good borrower and … you only have 9% to put down, why should you have to pay more to get into the mortgage market?" he said.