Far from ending their dominance, policymakers are drafting new rules governing the origination and securitization of mortgages that might only strengthen the stronghold of Fannie and Freddie, according to FBR Capital analyst Paul Miller.
"We foresee a continued dominance of the implied government guarantee. While Fannie Mae and Freddie Mac may be ended "in name," Congress will keep the infrastructure in place to further its homeownership goals," Miller wrote in a report titled the "Future of the Housing Market: Winners and Losers."
The Consumer Financial Protection Bureau is in the middle of framing rules including the definition of a "qualified mortgage" and a "qualified residential mortgage" that are likely to have a significant impact on the ability of private-label securitizers to compete in the market, according to the analyst.The qualified mortgage rule seeks to ensure that banks lend only to those borrowers who have an "ability to pay". Originators who make a non-QM loan, face the risk that the borrower will contest the foreclosure in court that would result at the very least in delays and legal fees. If they originate a "qualified mortgage" they are offered legal protection, though regulators are still debating the nature of the protection. To avoid the legal risk, banks might end up originating only QM loans, which means there will be no more interest-only loans or no/low doc loans or sub-prime loans -the kind that have traditionally been underwritten by the private-label market. A separate rule also requires banks to retain at least 5% of the loans they originate on their balance sheet. The rule is meant to prevent banks from originating bad loans and offloading them to investors. But to avoid raising the cost of mortgages, the rule exempts certain "qualified residential mortgages" from the risk-retention. A draft of the rule Miller notes, exempts mortgages with loan-to-value ratio of more than 80% from risk retention as long as they were securitized by the GSEs.
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