One wonders how the bankers can possiblyargue for open season on lending when they failed so horribly each and every timethey had the opportunity. Yes the banksmust have skin in the game. Five percentmeans that their fees at least are at risk for a few years as it should be. Abanker laying of a mortgage is a used car salesman and as deservedly creditable.
Don’t they get it? A stable banking system with strong balancesheets is a necessity. That is achieved byhaving a portfolio of loans that are stable that you understand and know. Creating loans to resell is the business ofan independent broker and should be treated that way.
As usual there is yapping aboutthose who do not qualify. This is aproblem that must be addressed with other product, however constructed. Again in Canada
I do not think the Canadiansystem has all the answers put it is inherently conservative and has avoidedthe worst excesses of the US US
Regulators to Set Rules on Mortgage Securities
By FLOYD NORRIS
Published: March 28, 2011
Banks will be forced to retain some risk when they securitize all butthe most conservative mortgages under rules that regulators are expected tovote on Tuesday. But the banks are likely to be given wide leeway indetermining what risks to keep.
Major banks, hoping to revive the mortgage securitization market thatcrumbled when many securitizations proved to be anything but safe, had askedregulators to define almost any mortgage — except for the most extreme types nolonger being written anyway — as a “qualified residential mortgage.” But a summary of the proposal, provided to TheNew York Times on Monday night by a person briefed on the decision, showed thatthe regulators rejected that advice and decided that only the most conservativemortgages would qualify. Securitizations of any other mortgages would requirethe banks to retain “skin in the game” of at least 5 percent of the risk.
The Dodd-Frank Act mandated that banks maintain at least a 5 percentthreshold for risk on mortgage securities. But the law granted an exception for“qualified residential mortgages” while leaving regulators to decide what thatmeant. Bankers warned that without a broad definition many borrowers would beunable to get loans, while others argued that two mortgage markets coulddevelop, with loans requiring banks to retain a stake presumably costing more.
“It is quite draconian,” said Ellen Marshall, a lawyer who representsbanks as a partner in Manatt, Phelps & Phillips and was reacting to thedocuments once they were posted on media Web sites.
“It is requiring the 5 percent of risk retention on a huge swath of themarket. It is permitting securitization without the retention of 5 percent onlyin the case of very old-fashioned mortgages.”
Banks, however, did get regulators to agree to a broad definition ofhow that risk can be retained, as well as of who will have to retain it. Insome cases they can retain risk by holding onto mortgages that are deemedidentical to those being securitized. In others, they would be able to eithertake the first 5 percent of losses or to hold 5 percent of every class of security.
Before the credit crisis erupted, many mortgages were sold by banks insecuritizations, and most of the securities were rated AAA because widespreaddefaults were deemed almost unthinkable. It turned out that many of thesecuritizations were stuffed with risky mortgages, sometimes made to peoplewith no proof of income. Defaults rose sharply, and there have been substantiallosses.
The law passed by Congress last year tried to assure that bankers wouldpay attention to quality of loans by forcing them to retain a stake.
Under the proposed rule, mortgages to buy homes will require buyers toput down at least 20 percent if banks want to securitize the loan withoutretaining a stake. Loans to refinance mortgages would not qualify unless thenew loan was for no more than 75 percent of the value of the property, or 70percent if the refinancing enabled the borrower to take out cash. It would alsoset standards for the minimum income that a borrower could have relative to themortgage payments.
No borrower who fell two months behind on any loan within the previoustwo years could get a qualified mortgage.
Banks had asked regulators to allow borrowers with smaller downpayments to receive qualified loans if they took out mortgage insurance. Theregulators rejected that idea, according to the summary, saying that the lawrequired them to consider not whether private insurance would reduce lossesfrom defaults but whether it made defaults less likely to begin with,presumably because the insurers carefully weigh risks. Banks were told theycould submit studies on that issue, and that it could be reconsidered.
The proposed rule also sets minimum standards for servicing of loans,something banks had opposed.
One issue where banks appear to get most of what they asked for was onthe question of which institution had to retain risk. A loan could be made byone company, aggregated by another and securitized by a third, perhaps in adeal that included loans put together by other aggregators. Under the proposedrule, the institutions could split the risk among them, subject to some limits.
There had been much discussion of whether to require a “vertical”stake, in which the bank retains 5 percent of every class of thesecuritization, or a “horizontal” one, in which the bank would assume the first5 percent of losses. The regulators said either would do, and added that theywould take an “L-shaped interest,” combing the two, or would allow a bank totake a representative sample of the loans and keep all the risk for thoseloans.
The proposal was developed by staff members of the Office of theComptroller of the Currency, the Federal Reserve, the FederalDeposit Insurance Corporation, the Securitiesand Exchange Commission, the Federal Housing Finance Agency and the Departmentof Housing and Urban Development, and is expected to be formally proposedby each of them, with the F.D.I.C. set to vote Tuesday.
The rule would be put out for comment and could be revised aftercomments are received.
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