Federal regulators Thursday asked for public comment by June 10 on their proposal to require lenders that package mortgages for the secondary market to assume some of the risk of those loans.
The regulators didn't need to ask. There has been no lack of comment since details of the rule change began circulating through the housing and finance industries.
The proposed credit-risk-retention rule is designed to implement Section 941 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which seeks to prevent a repeat of 2008's meltdown of the financial system.
The proposal would establish a definition for qualified residential mortgages _ a class of loans that would be exempt from the risk-retention requirement. Criteria for those loans would include borrowers' credit histories, payment terms, and loan-to-value ratios "designed to ensure they are of very high credit quality," the regulators say.
Housing and consumer groups, however, say that would require most home buyers to put down a minimum of 20 percent on loans to have them considered qualified residential mortgages.
In a teleconference Wednesday, National Association of Home Builders First Vice Chairman Barry Rutenberg called the rule and other proposed changes to government programs "a collective assault on housing."
"For the typical family earning $50,000 a year, it would take 12 years to scrape together a 20 percent down payment, and (the proposed rule) would cut annual home sales by 250,000," Rutenberg said.
"Low down payments did not cause the problem, but lax underwriting standards," he said. "This requirement will harm minorities and low-income homeowners disproportionately."
The proposal "will complicate the government's withdrawal from the mortgage market," said Lewis S. Ranieri, a former bond trader and former vice chairman of Salomon Bros., referring to the administration's efforts to wind down Fannie Mae and Freddie Mac. "So much of the market will become non-qualified residential mortgage that it will delay broad investor confidence in it."
Although, in their statement calling for public comment, the regulators said they sought "the potential for the rule to negatively affect the availability and cost of credit to consumers and businesses," few appeared to be buying it.
Ranieri countered that the intent of Dodd-Frank was to define a good loan to get the private investor back in the market, but that "no down payment figure was given."
Mortgage Bankers Association President John Courson called the risk-retention proposal "rigid and highly prescriptive."
"We believe that such a narrow construct ... would limit mortgage opportunities for qualified borrowers more than it would reduce the number of problem loans," Courson said.
Barry Ziegas, of the Consumer Federation of America, said that when his group lobbied regulators to rein in exotic mortgages early in the last decade, they never responded.
Of the risk-retention proposal, Ziegas said: "The rule adds servicing standards for securitization, which has in the past created problems and idiosyncratic application of rules resulting in loss of homes."
But under the rule, "most borrowers will be lucky to qualify for a gold-plated mortgage, and (it) will relegate them to FHA and limited loan products, a lack of transparency, and higher costs," he said.
Mike Calhoun, of the Center for Responsible Lending in Washington, said the intent of one of the measure's sponsors, U.S. Rep. Barney Frank, D-Mass., "was to require those who placed securities in the asset-backed market to have skin in the game to assure quality."
The rule as proposed, however, would lock out more than half of all buyers, who would "face substantial costs and availability," he said.
To buy a house at the current national median price of $173,000, a buyer would have to bring to the settlement table 20 percent down, as well as closing costs averaging 5 percent of the transaction, Calhoun said.
That translates to $43,000 in cash. If it were 10 percent down, it would still be $25,000, he said, adding:
"This will artificially depress home values and drag down the economy."
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