04/01/2011

ASF Finding Allies in Risk-Retention Push

The American Securitization Forum will seek changes to a long-awaited risk-retention proposal that the government released March 29.

The trade group is in the early stages of crafting its response, but already is seen as a candidate to align its efforts with those of financial-industry and consumer-advocacy groups including the American Bankers Association, Center for Responsible Lending, Consumer Federation of America, National Association of Home Builders, National Association of Realtors, National Community Reinvestment Coalition and Sifma. Among their likely requests: That regulators widen the definition of “qualified” mortgages whose securitizations would be exempt from the risk-retention rules.

The lobbying effort will likely focus on the U.S. House instead of the agencies that issued the proposal — the FDIC, Federal Housing Finance Agency, Federal Reserve, HUD, SEC and Treasury Department. That's because the risk-retention measure is a product of the Dodd-Frank Act, which faces some opposition among Republicans, who took control of the House in January.

With consumer groups also on board, the feedback could resonate well beyond House Republicans. “This is one of the few issues where a myriad of industry groups and consumer groups will be banding together and pushing for changes,” ASF executive director Tom Deutsch said.

Indeed, one lawyer said it will be difficult for lawmakers to ignore the pressure. They could respond by talking to regulators privately, holding public hearings or introducing new legislation.

The ASF and its peers are expected to begin contacting Washington officials in the coming days, ahead of an April 14 hearing on the risk-retention proposal at which Deutsch and others will testify before the House Financial Services Committee's Subcommittee on Capital Markets and Government Sponsored Enterprises.

The risk-retention proposal would require issuers or underwriters to retain a 5% interest in any securitization whose underlying credits don't meet an extensive list of requirements. Topping the conditions for home-loan deals: that borrowers put down at least 20% on new home purchases and have at least 25% equity for refinancings — or 30% for “cash-out” refis.

Securitization professionals complain those limits would restrict their ability to finance mortgages, while consumer groups worry about rising borrowing costs and a reduction in the availability of home loans.

Also of concern is a provision for “premium capture cash and reserve accounts” that would strip mortgage-bond issuers of the ability to monetize the excess spread from their deals by creating interest-only securities. Instead of pocketing the proceeds from sales of those instruments, the sellers would have to put the cash into reserve accounts that would cover losses among the broader loan pools.

Market players grumble that lenders will try to make up for the lost revenues by hitting their borrowers with higher origination fees. They also point out that startup shops that aim to buy and securitize mortgages will find it harder to gain momentum, as they often survive mainly on the proceeds from sales of interest-only paper in the early going. “We thought the whole idea of this was to make it easier for us to get back into the market and start lending again. This rule runs counter to that,” one banker said.

Bankers say they plan to fight for a modification of the provision, but concede that regulators probably won't scrap it altogether. Some have suggested a shift under which lenders would share origination fees with mortgage buyers.

Comments are due June 10, with a final rule expected 2-6 months later.

One potential twist: As part of a broader effort to unwind Fannie Mae and Freddie Mac, the House introduced a proposal on March 29 that would strip a risk-retention exemption afforded to originators of Fannie and Freddie loans. While that Republican-sponsored measure would broaden the qualified-mortgage definition rather than narrow it, the outcome could be a more level playing field for private-label loans. House Financial Services Committee member Barney Frank (D-Mass.) said on March 30 that he supports the change.

“I think it stands a fair chance,” Morrison & Foerster attorney Ken Kohler said.

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