Access to mortgage loans may be severely restricted if a new rule proposed by U.S. regulators isn’t amended, say mortgage industry executives.
“If this proposal goes through, the way it’s written, I think the housing market will not recover for years to come,” says Joe Murin, chairman of consulting firm The Collingwood Group and a former president of Ginnie Mae appointed by George W. Bush.
The 233 page rule, proposed Tuesday by six regulators including the Federal Reserve and the U.S. Treasury Department, will play an important role in determining how much risk banks have to retain from mortgages they originate or package into bonds known as mortgage backed securities (MBS) and then subsequently sell into the market.
While the debate can get highly technical, the issue is critical, as the boom and bust in MBS stands at the very centre of the housing crisis.
Murin’s main objection to the proposed rule is that it would require a 20 per cent down payment on what will be termed a “qualifying residential mortgage” (QRM).
While the QRM designation matters very little at the moment, it will become very important as the Federal government seeks to reduce the role of Freddie Mac (FMCC.OB ), Fannie Mae (FNMA.OB ) and the Federal Housing Authority, which are currently thought to stand behind more than 95% of new home loans made in the wake of the crisis.
As the role of those government and quasi-government entities is gradually reduced, QRMs are expected to become the only available option for many people with limited access to credit. Requiring a 20 per cent down payment for QRMs “looks like it will exclude a lot of lower- to middle-income borrowers,” says Patrick Dolan, a partner at corporate law firm Dechert who advises many big mortgage industry firms. He believes that requirement may be lowered after the 60-day comment period.
Wall Street lobbying group SIFMA appears to have similar concerns that the QRM definition is so narrow that it could hurt access to credit and stall the recovery.
However, in a cautiously-worded press release after the rule was released Tuesday, SIFMA noted that “as proposed today, the QRM definition appears to be narrowly crafted.”
One bank that has been outspoken in arguing for a narrow QRM definition is Wells Fargo. While Wells has argued for an even higher down payment than 20 per cent, it is thought that the bank would be more pleased than most industry participants with a 20 per cent number. A Wells Fargo spokeswoman says only that the bank is reviewing the proposal.
The fact that mortgage insurance will not play a part in determining whether a mortgage qualifies as a QRM can certainly not be seen as a positive for the industry, though analysts were not overly concerned, and shares of MGIC, Genworth, Radian and PMI all rallied Tuesday.
Mike Grasher, analyst at Piper Jaffray, said the proposal was “status quo,” and he expects mortgage insurers to lobby effectively to carve out a stake for themselves in what constitutes a QRM.
A UBS report on Genworth reiterated its “Buy” recommendation and stated the proposals have limited impact.
Making changes to the rule should not be taken as a given, however, notes another Dechert partner, Bob Ledig.
“It’s clear agencies are welcoming, and expect, a lot of comments on the proposal and seem to have an open mind towards it, but when six agencies get together and put something on a piece of paper I think you’ve got a big hill to climb to change their initial positions,” Ledig says.
The rule is now subject to a 60-day comment period before regulators take any further action.
In the meantime, some legislators are already working to invalidate the new rules, which were a requirement of the Dodd Frank Wall Street Reform Act passed last year. On Tuesday, Representative Scott Garrett (R-NJ) proposed legislation that would override the rule proposed Tuesday.
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