Mortgage Financial Reform – Risk Retention

As every headline and investigation is continuing to present the mortgage and finance industry in a derogatory light it is evident that we need to reform the way that our business is executed and regulated. A number of beneficial provisions have been addressed in the Regulatory Reform bill that was passed through the House and nearing the Senate floor. There is one section in particular that needs to be addressed theoretically and practically prior to being able to make a Senate decision.  The proposal for Risk Retention needs to be seriously evaluated for the unintended consequences that this regulation will cause prior to making an impactful Senate decision.

Risk Retention Details:

• Each originating company selling a loan into the secondary market is expected to retain 5% of that loan amount on the company books for “Risk Retention”

Unintended Consequences:

• The consumer will only be left with a hand-full of banks from which to secure a home loan. The implications are:
  • This would further perpetuate the “To Big To Fail Model”. If there were only a handful of companies remaining (i.e. the large depository banks such as Wells Fargo, Citi, Chase, Bank of America, etc) that are able to provide the personnel and resources to provide home loans, increased reliance on them would be further created. This is the direct opposite path we need to be taking.
  • Rates will go up because there will be less competition.
  • Liquidity in an already fragile market will become even more difficult to find.
  • Rates will go up because these banks will need to charge higher rates to profit more to compensate from having less liquidity to fund loans.
  • It will take considerably longer to close a loan. After the pull back of the large banks from the wholesale channel we saw them taking up to 60 days to close a loan. This timeframe will only increase with no non-depository or private mortgage bankers who currently fund 25% of the Nation’s mortgage loans.
  • The quality of loan originators who would be left to service the Nation’s consumers would be poor. The Loan Officer’s who work for the large depository banks are exempt from getting their Mortgage Loan Originator License, which means they are not held to the same education and fiduciary responsibilities that non-depository or private mortgage bankers are. They have been referred to as “order takers” and not conceptually grounded in the practical applications and knowledge of what a good credit decision is.
  • The housing market will be further impeded due to less liquidity and sluggish loan approvals which would further hamper the housing market.
  • The economy will be further impeded because the companies who employ 25%  of the Nation’s mortgage financial providers will no longer have jobs. The non-depository or private mortgage bankers that comprise this 25% consist of companies that employ 20-300 employees each. This will greatly impact the already grave unemployment numbers and depressed economy.
  • The economy will be further impeded because many other companies within the financial services industry sector (i.e., warehouse provides, appraisers, scores of vendors) will no longer have the business to support their operations.

Why Non-depository or private mortgage bankers Will Be Forced To Close:

• Requiring an additional 5% layer of risk retention onto what is already in place for risk retention will consequently put nearly all non-depository or private mortgage bankers out of business. Non-depository or private mortgage bankers provide more than 25% of the Nation’s mortgage financing to consumers.
  • Non-depository or private mortgage bankers do not profit 5% or more on any individual loan, and as such, this 5% rentainment of funds would require that the compensation of all loan originators and operational staff would have to be drastically cut requiring them to have to find new careers. Keeping in mind that the non-depository or private mortgage banker does not garner, nor pay, the exorbitant profits, salaries and bonuses that our larger depository counterparts do that continue to be exposed in the media.
  • If non-depository or private mortgage bankers are required to keep the 5% risk retention on their books, they will be forced to close due to the taxation implications. The amount of cash that would be required to be maintained on the books that cannot be used or realized would create taxation implications that would be insurmountable for any remaining profitability to allow for business continuation.

Amendment to Risk Retention:

• We are asking that certain mortgage products be exempt from this 5% Risk Retention proposed law.
  • As non-depository or private mortgage bankers already have a very deep level of fiscal risk retention, the well underwritten highly-understood and recognized loans should be exempt from having to retain an additional 5% of risk retention. A typical 30, 20 or 15 year amortized loan that conforms to standards guidelines should be exempt. These are not the types of loans that caused the mortgage meltdown. These types of loans are safe and well understood.
  • Non-depository or private mortgage bankers already have risk retention.
    • Non-depository or private mortgage bankers are subject to Federal and State laws that require net worth which is managed for risk retention. These requirements are designed to force the non-depository or private mortgage banker to have liquidity to manage their risk.
    • Non-depository or private mortgage bankers are subject to even higher net worth requirements than Federal and State requirements from their warehouse providers and correspondent investors who they sell loans to in the Secondary market. These requirements are again designed to force the non-depository or private mortgage banker to have liquidity to manage risk.
    • Non-depository or private mortgage bankers have contractual agreements and obligations to correspondent investors where the loans are sold where-by the loan must perform under very specific terms or the non-depository or private mortgage banker is obligated to repurchase the entire loan, not just a portion such as 5%, back from where it was sold.
    • Non-depository or private mortgage bankers are required to indemnify any FHA loan if that loan was not unwritten directly according to the HUD guidelines during HUD’s QC process after insuring. This indemnification means that the non-depository or private mortgage banker is required to indemnify HUD for any losses if that loan does not perform for a period of 5 years.
    • Non-depository or private mortgage bankers borrower their money on a short term basis from Warehouse lenders to fund loans on a daily basis. Warehouse lenders have very specific and safe products that are allowed  to be funded. They will not allow “exotic” types of loans to be funded on their line. Therefore, only the larger depository investors who service loans will be able to fund these “high risk” types of loans that are what propelled our industry into trouble in the first place.

Please take a moment to pass this on as everyone will be impacted if Risk Retention is not amendment from its current proposal. If you have any further questions or would like additional supplementary information please contact me directly at jamie@afrhomeloans.com.

Sincerely,

Jamie Korus