Robert Story, Jr., chairman of the Mortgage Bankers Association (MBA) reacted to the passage of S. 3217, the Restoring American Financial Stability Act of 2010.
By a vote of 59-39, the Senate approved the financial reforms considered needed by the Obama administration in the wake of the global financial crisis.
He said that the MBA has long supported a more efficient regulatory regime for the financial services industry, and passage of the bill is another important milestone. But, the bill, Story said still has flaws that will negatively impact borrowers as well as the real estate markets.
"The next step will be to reconcile the differences between the House bill and the Senate bill," Story said. "While there are a couple of ways this could happen, MBA believes the American people would be best served by Congress convening a formal conference committee. Of particular importance to us is ensuring that the final language on risk retention does not discourage prudent, responsible lending. If not, we risk doing long-term damage to our single-family, multifamily and commercial real estate markets."
He added that the Senate made good progress by creating a qualified mortgage exemption for lower-risk single-family mortgages from the added risk retention the bill proposes.
This approach, he said. will allow lenders to make prudent, responsible loans to well-qualified borrowers as well as help make the housing market's recovery sooner.
He said that the MBA is pleased that the Senate also recognized that risk retention can take different forms in commercial and multifamily real estate deals, such as reps and warranties and first loss positions.
Story added that the Senate bill finds value in the critical role that strong underwriting plays, and gives greater guidance to the regulators tasked with writing the new risk retention rules.
"The bill could further be improved by creating one consistent standard for the purpose of regulating residential mortgages," he said. "If legislators insist on moving forward with mandating additional risk retention, setting credit criteria and restricting certain loan products and features, they should use one consistent standard that works across the board to identify what is and what is not subject to the new rules."
In his statement, Story said that unless improvements are made in the Senate-House negotiations, this bill will most likely bring regulations that will only further limit credit for borrowers, make real estate purchases more expensive as well as drag out the ongoing turmoil in the real estate markets.
Meanwhile, the CRE Finance Council noted in a release today that the newly passed bill contains retention language that it supported.
The said provisions improve the construct of ABS reforms as well as help the market for commercial real estate finance to recover.
As passed, the Senate legislation includes specific language, offered by Sen. Mike Crapo (R-Idaho), that would structure risk retention or "skin in the game" that considers the commercial mortgage market's unique nature.
Specifically, according to the CRE, the Senate-passed allows U.S. regulators to choose the most appropriate form of retention for commercial real estate finance. It customizes the requirement and grants financial regulators the flexibility to structure the new mandate in several ways, including a percent retention, underwriting standards and controls, or via stronger representations and warranties.
The U.S. regulators are now allowed to consider allowing a third-party investor, aside from the securitizer or originator of loans, to satisfy a potential retention mandate as long as they do three things: perform due diligence, purchase a first-loss provision and retain this risk.
"Today's language passed by the Senate provides important and tailored reforms that have been a top priority of the CRE Finance Council and its membership," said Patrick Sargent, president of the council. "As we've advocated since last year, reforms must provide certainty and confidence in order to support private lending and investing that is critical to an overall recovery in commercial real estate," he said.
Also in the final Senate version is a provision that would change the process of selecting rating agencies to perform initial ratings of structured finance products. The amendment would, among other items, require the Securities and Exchange Commission (SEC) to establish a self-regulatory organization – known as the Credit Rating Agencies Board – to determine who conducts the initial rating for any structured financial products. The outlook for this provision also remains unclear, as CRE Finance Council continues to examine its potential impact, as drafted.
With the passage of the Senate-side legislation, the prohibition on proprietary trading by banks and banking holding companies, known as the Volcker Rule, is still on the table and will be a significant issue for resolution during the course of the Senate and House reconciliation process.
While added changes are possible in this area, there remain concerns that, depending on how it is structured, such a provision could impact the securitized credit markets, particularly the ability to hedge risk and warehouse/aggregate loans.
The passed Senate bill, S. 3217, now must be reconciled with the House legislation that was passed by lawmakers last December before the legislation moves to the White House for signature into law. The House bill also contains similar language on retention supported by the CRE Finance Council.