The Senate adopted an amendment 63 to 36 on Wednesday that would establish minimum mortgage underwriting standards, including banning yield spread premiums and no documentation loans.
The provision was authored by Democrat Sens. Jeff Merkley of Oregon and Amy Klobuchar of Minnesota and offered as an alternative to beat out a competing amendment from Tennessee Republican Sen. Bob Corker for adoption to the broader regulatory reform legislation.
The Corker amendment failed 57 to 42 and would have swapped out the bill's 5% risk retention requirement that is opposed by the banking industry and replaced it with a study. It also would have established minimum mortgage underwriting standards, including requiring at least a 5% down payment on all loans but those administered by the Veterans Administration.
The Merkley amendment is significant in that it specifically adds mortgage lending standards to the Senate regulatory reform bill, which left the issue up to a proposed consumer protection bureau. The regulatory reform bill that the House passed in December included mortgage underwriting standards based off separate legislation that it passed in 2007 but stalled in the Senate.
"This is critical to end no documentation liar loans — a big factor in the meltdown that occurred last year," said Merkley in support of his amendment on the Senate floor Wednesday. "Second of all, it establishes underwriting integrity so that underwriters will look at loan to value, look at credit history, look at current obligations…The Merkley-Klobuchar amendment ends steering payments. This is essential. The mortgage brokers and originators have been in a very awkward position where they have been paid bonuses for making a deal that it is not in their client's interest."
Corker said that Democrats were failing to acknowledge a chief problem that contributed to the housing crisis.
"It is a basic common sense amendment. I think everybody in this body knows that we as a country are going down a pretty slippery slope that we as politicians act as enablers," Corker said on the Senate floor Wednesday. "We don't tell people what they need to fear and instead we try to give them what they wish without any degree of discipline. And what this amendment does, it tries to restore within the housing market a focus on the core issue that took us into this crisis. Something that many people in this body do not want to discuss and that is the fact that there were a lot of loans written to people who had no ability whatsoever to pay them back and so this amendment does some very simple things, No. 1 it requires a very modest 5% down payment for new home mortgages."
Senate Banking Committee Chairman Chris Dodd spoke out against the Corker alternative on the Senate floor Tuesday evening, blasting it for swapping out the bill's risk retention provision and replacing it with a study. He said that requiring securitizers to keep some skin in the game is a backdoor way to ensure prudent underwriting.
"Our bill requires securitizers to retain an economic interest in the material portion of the credit risk for any asset that securitizers transfer, sell or convey to a third party," he said. "It's skin in the game. A skin in the game requirement creates incentives that encourage sound lending practices, restore investor confidence and permits securitzation markets to resume their important role as a source of credit for households and businesses…. A study is not a credible response."
He added in an interview later that the 5% down payment requirement would diminish homeownership opportunities and knock out the Federal Housing Administration (FHA) loan programs that let borrowers put as little as 3.5% down.
"In some cases 5% down is maybe fine, but you don't require that for everybody, because there are other ways," he said. "Why not FICO scores? We can look at all sorts of specific things but having that you exclude an awful lot of people, FHA loans. Millions of Americans get loans through FHA. We are not going to cut that off. Eighteen percent of first-time homebuyers with good underwriting standards are putting down 5% or less. You put that requirement in you exclude an awful lot of people."
Dodd added that he supported the underwriting criteria. "The other criteria that Merkley and Klobuchar are including establish good underwriting standards," Dodd said. "We're all for that."