Risk-Retention Fight Turns to Military Impact

Opponents of proposed risk-retention rules for mortgage securitizations are expanding their lobbying efforts to embrace a potentially persuasive argument: That the regulations would cut off financing for military families.

The American Securitization Forum is among a number of trade groups and advocacy organizations seizing on the idea, based on comments that USAA submitted to the FDIC, SEC, Federal Housing Finance Agency, HUD, Treasury Department and Federal Reserve on Aug. 1.

USAA maintains that the risk-retention rules, proposed by the six agencies on March 29, would have a lopsided impact on service personnel. That’s because their loans often fail to meet suggested criteria for so-called qualified residential mortgages — the only types of home loans that lenders could securitize without keeping stakes of 5% in their deals.

USAA, a San Antonio, Texas, company that specializes in lending to current and retired military personnel, points to instances in which deployments, base closures or transfers can force families into short sales that leave blemishes on their credit records. Likewise, such sudden moves can leave those individuals without the 20% down payments needed for qualified-mortgage status. The upshot is that their borrowing costs as non-qualified borrowers would rise, perhaps to prohibitive levels.

While ASF and others are still considering how to work that argument into their own lobbying campaigns, they recognize how politically powerful the message could be — even if the market-wide impact on lending volume might be modest. The efforts could focus in part on lawmakers with military backgrounds, including Sen. Jack Reed (D-R.I.), a former Army ranger who heads the Senate Banking Committee’s securities subcommittee. “There’s no doubt that Reed is concerned about the disproportionate impact of these rules on members of the military. The USAA is very plugged in with the military members of the Congress, many of whom have loans there,” one source said.

Timing is key. USAA submitted its comments on the deadline for feedback on the risk-retention rules. But there’s still time for lawmakers to convince regulators to adjust or even re-write the proposal, which may not see a final version emerge until December.

Ultimately, the hope is to win lower loan-to-value requirements and eased credit criteria. USAA suggests changes mirroring those brought up by Rep. Barney Frank (D-Mass.), which include setting the required down payment as low as 4%. The lender also points out that while military borrowers might turn to the FHA for loans, doing so would undermine recent efforts to extract the government from the mortgage market.

Advocacy groups already have made a similar case when it comes to the poor and middle class. “Nearly all the major trade associations have advocated for a re-proposal of these rules, so the affect they could have on military personnel certainly adds another strong example for why these rules need to be reworked,” ASF executive director Tom Deutsch said.

Still, uncertainty remains. “There is fear that we won’t see the substantive changes that have been called for,” another source said.

In that case, market players might sue to block the rules, delaying their implementation indefinitely, Deutsch said.

USAA and ASF also have pushed back against proposed risk-retention rules for auto loans, calling them unnecessary. USAA has issued a number of auto-loan securitizations and catastrophe-bond deals over the years, but hasn’t been active in selling home-loan paper.

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