Regulators approve risk-retention rule for mortgages

Six federal agencies wrapped up final approval of a rule on Wednesday requiring banks to keep a stake in the mortgages they package and sell.

The main prong of the long-awaited regulations requires lenders to keep at least 5 percent of the risk associated with loans on their books in an effort to avoid the shoddy mortgage practices that contributed to the recession and housing crash. 

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Housing and Urban Development Secretary Julián Castro called the rule an "important step forward in creating an environment where good lenders and good borrowers can work together without reservation."

He said the effort is part of the Obama administration's commitment to create certainty for lenders to expand access to credit to underserved borrowers, while ensuring that past abuses aren’t repeated.

The final qualified residential mortgage (QRM) rule, required under the Dodd-Frank financial law, aligns with the Consumer Financial Protection Bureau’s (CFPB) qualified mortgage (QM) regulations, which went into place in January to ensure borrowers have the ability to repay their home loans.

The rule also provides a safe harbor for lenders to operate to determine who should receive loans.

The final regulation does not include down payment standards that were a part the initial draft and would have required banks to hold risk on any loans where a borrowers put down less than a 20 percent of the value of the home. 

On Tuesday, the Federal Deposit Insurance Corp. (FDIC) was the first to approve the rule with the other agencies following up on Wednesday.

But amid the approval some mortgage lenders expressed concern that it could hamper lending.

Mike Coleman, director of regulatory affairs for the National Association of Federal Credit Unions (NAFCU), said his group remains concerned about a potentially negative effect the rules would have on mortgage lending.

"We remain concerned about elements of both definitions and strongly encourage the agencies to reconsider the effects each would have on mortgage lending," he said. 

That sentiment was echoed by Securities and Exchange Commission Commissioner Michael Piwowar who said the rules keep most of mortgage finance control in hands of the government and will continue crowding out private lenders.

"I have considerable skepticism as to whether taxpayer-backed GSE-sponsored securitizations will ever be subject to the risk retention requirements and be forced to operate on the same level playing field as private securitizations," he said.

He argued that government-controlled Fannie Mae and Freddie Mac account for 78 percent of all residential mortgage backed securities issuances and, along with other agencies, bring government's total to about 100 percent of the market.

Government-controlled Fannie and Freddie are exempt from the rules.

The SEC voted 3-2 vote to back the rule.

Piwowar argued that the SEC's economic analysis found that "mandatory risk retention could impose significant costs on the financial markets” that will likely be passed on to borrowers, either by increased borrowing costs or loss of access to credit and will "cut directly against the intended benefits of securitization"

Daniel Gallagher joined Piwowar in his dissent.

Commissioner Kara Stein said the rule "is one step in a larger effort to repair and revive the securitization market, and our task is not complete."

Overseen by the Treasury Department, the final rule was crafted and issued by the Federal Reserve, HUD, the FDIC, the Federal Housing Finance Agency, the Office of the Comptroller of the Currency and the SEC.

The final rule will be effective one year after publication in the Federal Register for residential mortgage-backed securities and two years after publication for all other securitization types.