NEW YORK (
) --The mortgage industry wants regulators to go easy on new rules that would require securitizers to keep some "skin in the game" in the latest sign of Wall Street push back against financial-reform legislation that was passed in July.
Section 941 of the Dodd-Frank bill requires securitizers to retain a portion of the credit risk of loans they securitize - but it also allows for a "qualified residential mortgage" (QRM) exemption to that rule.
In a letter last week, the Mortgage Bankers Association (MBA) urged regulators to adopt broad exemptions QRM. The MBA argues that if the rules aren't constructed properly, average Americans won't be able to get mortgages. The group also warned that another program for less-than-affluent borrowers through the Federal Housing Administration (FHA) would be "overutilized" if the QRM isn't flexible.
"Underwriting is an art and not a science," MBA President and CEO John Courson said in the letter. He also noted that products receiving special scrutiny - essentially, subprime loans - "were, for many years, not problematic when underwritten prudently."
The MBA made several recommendations to the Department of Housing and Urban Development (HUD), the Federal Housing Finance Agency (FHFA) and the
Securities and Exchange Commission
as they go about writing rules for the QRM. Three regulators will be working together to prescribe the specifics of the QRM exemption.
The group agrees that "balloon payments" shouldn't be permitted, and also believes borrowers should be "fully documented" to verify their ability to pay debt.
However, the mortgage industry is "particularly concerned" that the government might have a different definition of "overleveraged." The MBA urged that the government not prescribe specific debt-to-income (DTI) ratios, but if regulators move ahead on that front that they not be required to be lower than 50%, with "specific compensating factors."
And while the MBA is not a supporter of "negative amortization" loans, under whose terms borrowers can pay less than the interest due, it suggests that regulators allow "interest-only" mortgages.
There are some dangers to the government making exceptions for risky mortgage products in the securitization process.
For instance, one of the most problematic mortgage books of the financial crisis was the "Pick-A-Pay" portfolio housed in Wachovia's mortgage division. Those borrowers were allowed to decide whatever monthly payment they wanted, including less-than-interest. The loan book has resulted in billions' of dollars worth of losses - both for Wachovia and for
, which eventually acquired the crumbling bank. Wells has allowed "interest-only" payments as a workout of last-resort to borrowers in their homes.
Similarly, the loans causing
Bank of America
the most problems are mostly of the subprime and Alt-A variety that Countrywide originated to low-income borrowers with little documentation from 2005 to 2007. A healthy portion of the borrowers who are now "underwater" on their loans at all the big banks took on outsized loans they couldn't afford. They are now clearly overleveraged.
The MBA says that it wants clear, concise rules and would like HUD, the FHFA and the SEC to work together in formulating them. It also says the mortgage industry doesn't want rules that "condone risky lending practices."
Courson warns that "unnecessarily constraining the mortgage market will not only deny the American dream of homeownership to many qualified persons, it will further depress the housing market and threaten the economic recovery."
-- Written by Lauren Tara LaCapra in New York
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