A suggestion that would require that companies securitizing mortgages retain 5 percent of the risk on all but the safest loans could leave borrowers who are unable to put at least 20 percent down on a home purchase paying higher fees and interest rates, critics utter.
The new risk retention requirements were mandated by Congress in the Dodd-Frank Wall Street Reform and Consumer Protection Act, which contains a number of provisions intended to address problems created when loans are bundled into mortgage-backed securities and sold to investors.
The loan securitization process keeps money flowing into mortgage lending, helping make borrowing more affordable. But the process also insulated loan originators from losses and encouraged risky underwriting practices during the boom, critics say.
Regulators have some flexibility in implementing the new law as they draw up the definition of what will constitute “qualified residential mortgages” exempt from the risk retention requirements.
This week, the Federal Reserve and five other federal agencies proposed that borrowers must put at least 20 percent down for a residential loan to qualify for an exemption, and that points and fees on a qualified loan not surpass 3 percent of overall loan quantity.
The proposal – which is open for comments until June 10 – would also trigger risk retention requirements on mortgages when front-end debt-to-income ratios exceed 28 percent, and back-end ratios go over 36 percent.
Lenders seeking exemptions would be required to prove and document the borrower’s monthly gross income, monthly housing debt, and monthly total debt using the borrower’s monthly housing debt to calculate the front-end ratio and total monthly debt to calculate the back-end ratio.
The risk retention requirements would relate to “private label” mortgage-backed securities (MBS) not backed by Fannie Mae, Freddie Mac, and Ginnie Mae. Private label MBS, which were the main source of funding for subprime lenders during the boom, all but disappeared after the housing crash but could reemerge as the government winds down Fannie and Freddie.
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