Groups Warn of Risk Retention Provision in House Financial Services Bill

/PRNewswire/ -- Following is a Joint Statement on Risk Retention from the Community Mortgage Banking Project and the Community Mortgage Lenders of America:

Late Tuesday evening, the House Financial Services Committee released draft legislation to address systemic risks and "too big to fail" concerns. We appreciate the efforts of the Committee to enact reforms that will ensure that the events that led to the current financial market crisis are not repeated. However, we are deeply concerned that one Subtitle of the just-released draft Financial Stability Improvement Act would have a devastatingly, adverse impact on the secondary mortgage market, forcing community-based lenders to reduce lending or go out of business, which will significantly raise the cost of credit for consumers seeking affordable mortgages.

We are concerned that the broad risk retention provisions in the draft Financial Stability Improvement Act could jeopardize affordable mortgages for consumers by crippling the ability of community-based lenders to tap the secondary mortgage market for funding. This would further accelerate the consolidation of the mortgage market into just a handful of the largest institutions. The result would be reduced competition and choice for consumers - an ironic and counterproductive result for a bill intended to mitigate "too-big-to-fail" concerns.

The draft bill requires all lenders to retain up to ten percent of the credit risk on any loan sold into the secondary market. In addition, entities that acquire mortgages and issue mortgage-backed securities will also be required to retain up to ten percent of the credit risk. The committee's intent is to create incentives for sound underwriting standards and enhanced risk management practices by creditors and issuers of mortgage-backed and asset-backed securities.

However, by setting risk retention requirements at each step of the process from sale to securitization, and layering it over multiple years of originations, the cumulative impact of these requirements on lenders and issuers will reduce liquidity significantly and undermine the ability of the secondary mortgage market to deliver hundreds of billions of dollars of low cost mortgage credit needed each year.

The impact would be particularly severe for local lenders, including independent community mortgage bankers and local banks. Today, these lenders provide consumers with safe and affordable mortgage products, local market knowledge and top quality service. But these companies rely heavily on their ability to sell these loans into the secondary market. Today, these local lenders account for more than 40% of all home mortgage originations, and more than 50% of FHA loans. These companies are critical to our nation's mortgage supply chain, but simply are not structured to retain cumulative layers of credit risk over multiple origination cycles.

Independent mortgage bankers would be forced out of business, while community banks would face liquidity and balance sheet constraints that would sharply limit their lending activities. Even the largest institutions would be constrained in their ability to effectively utilize the attributes of the secondary mortgage market in delivering mortgage funds efficiently.

By contrast, H.R. 1728, which already passed the House earlier this year, addressed the risk retention standards in the mortgage market by establishing standards for "qualified mortgage" products that would be exempt from the risk retention requirements, and would therefore enjoy ample availability in the primary market. Qualified Mortgage products are traditional fixed and adjustable rate mortgages. These plain vanilla products, appropriately underwritten, were not the products that drove the current mortgage market debacle. Other provisions of H.R. 1728 (such as requiring creditors to document income and assets and assess ability-to-pay) help ensure that mortgage lenders utilize strong risk management practices and conduct sound underwriting, but with fewer adverse implications for secondary market liquidity.

There is no need for Congress to chance such a drastic outcome, when a more sensible compromise on this issue was forged in H.R. 1728 and passed earlier this year. The undersigned organizations look forward to working with Congress to achieve its objectives, without potentially disrupting the well-functioning secondary market for safe and affordable traditional mortgages.

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