The chief author of the Dodd-Frank Financial Reform Act took exception to what he called "the revolt against risk retention," saying requiring originators to hold 5% of the loan amount on their books is "one of the central things we did in the bill."
Rep. Barney Frank, D-Mass., said he is "greatly disappointed" in industry efforts to persuade law makers to review the requirement. "There are things we should look at again," the ranking member of the House Financial Services Committee said, "but resistance to risk retention is greatly mistaken."
A keynote speaker during the second day morning session at ASR's sister publication National Mortgage News regulatory reform conference, Frank said the ability of lenders to absolve themselves of any and all risk by selling their loans to investors "substantially diminishes" the one main safeguard against making bad loans, namely "the fear of not being paid back."
"There is no substitute" for having some skin in the game to prevent bad loans" the long-time legislator said. "If we do not build that into the process, all the regulations in the world won't prevent lenders from making loans to people who shouldn't have them. All (risk retention) says is stand behind the loans you make," Frank told the conference.
Some industry groups are arguing that it is enough to ban dangerous loans, and that anything further is excessive. But Frank accused them of "trying to make exceptions to eat up the rule."
On the future of Fannie Mae and Freddie Mac, the Massachusetts lawmaker said that when the Republicans are not in power, they know what to do with the two government sponsored enterprises. But when they are in the majority, as they are now in the House, they come down with a case of "political Alzheimer's."
While a majority of Republicans on the House Financial Services Committee "want to get rid of Fannie and Freddie altogether," he told the conference, a majority of the committee does not. And since a substantial portion of the housing lobby does not want to see the GSEs dismantled, either, the Republican leadership is essentially "frozen," according to the Congressman.
"Republicans are frozen between their ideology and reality," he said. "So it is up to the Senate" to take the first step.
As for his own point of view, Frank said the hybrid Fannie-Freddie model as privately owned institutions with a public purpose "has to go." There should be "no social component" other than requiring such entities to put a small portion of their profits into a trust fund to back affordable rental properties, he said.