House Financial Services Committee chairman Barney Frank, D-Mass., is asking Senate conferees to drop a "qualified" mortgage exemption that would allow nongovernment loans to be securitized without risk retention.
In reconciling the House and Senate financial services regulatory reform bills, Rep. Frank is offering to totally exempt Federal Housing Administration, Department of Veterans Affairs, and Rural Housing Service guaranteed loans from a 5% risk retention requirement for MBS issuers. However, issuers of Fannie Mae and Freddie Mac MBS would have to retain 5% of the credit risk under the Frank proposal.
"It would create a huge imbalance in the marketplace in favor of FHA and VA loans," said Glen Corso, managing director of the Community Mortgage Banking Project. Mortgage industry groups prefer a Senate-passed provision that would allow regulators to totally exempt safe, fully documented mortgages from risk retention, which presumably would encompass Fannie/Freddie loans.
Industry groups claim qualified mortgages that are exempt from risk retention and shielded from liability could lead to a revival of the private mortgage market.
"The lack of a true safe harbor for following federally mandated minimum standards for a qualified mortgage will result in lenders and investors establishing even tighter credit standards than those called for in the qualified mortgage or avoiding residential mortgage investments altogether because of the potential for excessive legal risks," the joint letter says.
House and Senate conferees meet Tuesday to work out differences regarding risk retention, mortgage lending standards, creation of a Consumer Financial Protection Agency, and regulation of derivatives.