Federal Housing Administration mortgage volume could get a boost from regulatory reform, because loans insured by government agencies are fully exempt from the bill's risk-retention requirement.
The legislation finalized by the conference committee late last week would require originators to retain at least 5% of the credit risk in loans they securitize unless the assets meet a "qualified mortgage" test. All loans backed by the FHA, the Department of Veterans Affairs or the Rural Housing Service will automatically meet that test.
"FHA gets a pass," said David Kittle, senior director of industry relations for IMARC, a mortgage fraud investigation company, and a former chairman of the Mortgage Bankers Association. "Does it give them an advantage? Well, sure. Anytime you are carved out of something that can be onerous for everybody else, then certainly you benefit."
Certain — and possibly most — loans securitized through Fannie Mae and Freddie Mac will also be eligible for securitization without risk retention.
"I believe chances are very good that in the future almost every mortgage that Fannie and Freddie either buy or securitize will be qualified mortgages under the risk-retention provision," said Glen Corso, managing director of the Community Mortgage Banking Project, a trade group.
But without an automatic exemption, lenders will have more hoops to jump through when they make loans headed to Fannie or Freddie, giving FHA an edge.
How many hoops will ultimately depend on how a "qualified" mortgage is defined. Under the final bill, federal banking agencies, the Securities and Exchange Commission, and Federal Housing Finance Agency will draft rules establishing underwriting standards and allowable product features for these fully documented loans. Qualified mortgages also have to meet a new and tougher "ability to repay" standard in the bill along with a 3% limit on points and fees and a separate 2% limit on bona fide discount points. Regulators have the flexibility to set risk-retention requirements lower than 5% for residential loans that don't meet the qualified mortgage test.
Balloon, negative amortization, and most interest-only notes will be excluded from the definition but debt-to-income ratios and verification practices must be defined by regulators and could change. The bill, as expected, gives little boost to a revival of the private-label securitization market.
"Time and time again we keep hearing that we need the private sector to jump in, yet all the regulations that are being passed are keeping them out of the game, on the bench, on the sidelines," said Sylvia Alayon, senior vice president of national operations at due diligence firm Capital Markets Assessment Corp. "We do need the private sector because many loans, like jumbo loans, can never be absorbed by the government agencies, and they represent a significant part of the market."
Still, mortgage veterans were relieved on Friday that the bill will not force them to retain risk on all securitizations, regardless of loan characteristics, as in the initial language they had lobbied against.
"It's nice to win one," said Lewis Ranieri, co-inventor of the mortgage-backed security.