Tom Deutsch, the executive director of the American Securitization Forum (ASF), has issued a statement in support of the Federal Deposit Insurance Corp.'s (FDIC) vote today to approve proposing risk retention rules jointly with other federal regulators.
“The [ASF] supports risk retention proposals that allow appropriate tailoring to different classes of securitized assets, while providing a meaningful alignment of economic incentives," Deutsche said.
Under the plan that was proposed jointly by federal regulators regulators, qualified assets such as auto loans, commercial loans, commercial real estate, and residential mortgages would not be required to retain any part of the credit risk if they meet the underwriting standards included in the proposal.
The regulators stated that auto loans, for instance, considering that they are a depreciating asset, should focus mainly on the borrower's ability to repay the loan.
Deutsch said that given that the risk retention rules apply to all forms of consumer and business credit that are securitized, this flexibility is "critically important to prevent these rules from turn-ing off the essential spigot of capital market funding for consumer and business loans."
However, he said that the "extremely rigid proposals" for a qualified residential mortgage (QRM), together with explicit exemptions for GSE-guaranteed mortgages, will further prolong the U.S. government’s 95% share of newly originated mortgages. The QRM proposals, he said, will keep a considerable amount of private capital on the sidelines, while pressuring the Federal Housing Administration to continue to fill the backstop role for mortgage credit risk.
"Drawing private capital out of the mortgage finance system, rather than encouraging its entry, will only serve to further depress home prices nationwide and keep first-time home buyers out of a housing market suffering from a severe oversupply of available homes.," Deutsch said.
Instead, the ASF strongly encourages sound underwriting decisions through improving the alignment of interests between RMBS issuers and investors. However, to avoid risking the RMBS market's fragile recovery and to promote the flow of affordable credit, a balanced QRM definition is essential, Deutsch added.
No to Combined Risk Retention/Servicing
The ASF does not support the proposals by the joint regulators that are "well beyond the scope of the Dodd-Frank Act" to promulgate mortgage servicing standards as part of the risk retention requirements.
"There is no legislative language, intent or even Congressional discussion leading up to Dodd-Frank’s passage that would provide an appropriate legal basis to promulgate servicing standards under the risk retention provisions of Section 941 of the Dodd-Frank Act," Deutsch said in his statement.
The Securities Industry and Financial Markets Association (SIFMA) also released a statement from Richard Dorfman, managing director and head of the association's securitization group, regarding the proposed rule implementing the risk retention requirements.
“SIFMA welcomes today’s proposal from regulators on risk retention standards and the definition of a [QRM]," Dorfman said. "We support the concept of risk retention as a mechanism that can serve to align the interests of securitization participants, in addition to other measures that also promote this alignment."
Dorfman said that risk retention, if calibrated to the risk profile and structural features of different asset classes, is a key step toward increasing broader confidence in securitization. The calibration needs a careful analysis of the consumer, market, financial, capital, accounting, and behavioral effect of the different constructions of retention regulations, he said. "Regulators appear to have taken steps in this direction, and we look forward to further reviewing and providing feedback on the proposal," Dorfman added.
The QRM definition will have a considerable impact on the availability and cost of mortgages for consumers, Dorfman said. Equally important is the effect on retail and MBS institutional investors. "It is essential that regulators implement an effective standard, which strikes a balance between credit quality and availability, while not making mortgage credit unaffordable," Dorfman said
Dorfman said that it is important to have a market impact analysis of this QRM proposal, which should consider proposed servicing standards as well ashow the QRM definition aligns over the long term with the conforming loan market.
MBA Reacts Too
Meanwhile, the Mortgage Bankers Association (MBA) said that risk retention rules should conisder the borrower's entire credit profile. The association aknowledged that factors including downpayment, DTI ratio and past payment history can serve as accurate predictors of loan performance. However, the trade group said that each of these factors should be considered independently.
"The rule should allow for consideration of a borrower's entire credit profile before determining whether risk retention is necessary on a given loan," said John Courson, president and CEO of the MBA. For instance, the group believes that a lower downpayment loan could be less risky if a borrower has a strong history of making payments on time and if the borrower's DTI ratio is on the lower end of the scale.
Like the ASF. the MBA also doesn't believe in the GSE exception from retention. "While we believe that the exemption for loans sold to Fannie Mae and Freddie Mac while they remain in conservatorship will help provide liquidity during the current period of market instability, we do note that such an exemption does little to shrink the government's footprint in the housing finance system and could slow the return of the private secondary mortgage market," Courson said.
Additionally, and also like the ASF, the MBA believes that mortgage servicing standards should be addressed via separate discussion and rulemaking, and not included in the risk retention rules.