by Dean Hartman on January 20, 2011
The Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law by President Barack Obama on July 21, 2010. The law’s far reaching impact will take years to understand, but as professionals we do know that Title IX (Risk Retention) will have a dramatic impact on consumers and the mortgage industry.
What is Risk Retention?
Risk Retention is a new burden for those who securitize mortgages- those entities that bundle closed loans into pools and sell them in the secondary market. These are typically Wall Street style entities. They have little to no direct impact with the consumer, but play a vital role in maintaining liquidity in the housing market. Their role is to replenish the cash available for lenders to lend by buying closed loans from lenders (thereby providing new cash for lenders to lend again). As intermediaries between lenders and long term investors, securitizers perform a much needed function.
While it seems that loans guaranteed by the government (FHA, VA, USDA, etc) will have their securities exempt, there is still a huge number of conventional loans (including loans slated for Fannie and Freddie) that will be impacted.
As a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act, these securitizers will be required to retain an interest in many of the loans. Up-to-now they mostly have just been a pass-through entity. That adds costs to their operations; costs that will have to be passed on to the consumer.
What will be the cost?
Good question! Although this is slated for enactment and enforcement in April, there is no clear definition or direction from the government. The bill talks about retention of 5% of the risk, but what is the risk? We are confident in saying it’s not 5% of the loan amount because typically a lender doesn’t lose all their money in a foreclosure and not every loan gets foreclosed on. There is some sentiment that “risk” might be defined as 2% of the loan amount; and 5% of that would only be 10 basis points, but that would likely mean a 10 basis point hike in mortgage interest rates to capture the additional cost from the consumer. That hurts home buyers, sales prices, and slows recovery.
Understand that everyone is taking educated guesses. We can see scenarios where lender would be almost forced to avoid lower loan amounts which would have an even bigger impact on the areas that fuel recovery- neighborhoods for first-time buyers. If it lowers the number of first timers who become home buyers, it will hurt those sellers who are looking to move up. Higher rates coupled with lenders shying away from lower cost neighborhoods…..bad recipe.
A lack of clarity and a lingering start date are forcing some of the major securitizers to start implementing strategies to protect themselves from a compliance prospective. Many lenders have focused on lobbying for a narrow definition of “risky” loans and have promoted eliminating convention loans that are fully documented with certain credit scores or income documentation, for example.
But, NOT Wells Fargo….
Wells Fargo is on record as proposing that anyone who buys a home utilizing conventional financing with less than a 30% down payment should be required to get Private Mortgage Insurance- a significant increase from the 20% now required. (Having that PMI, would make the loan virtually risk-less for the securitizer.) Of course, that PMI would bring with it additional costs for borrowers and, once again, make buying a home more expensive (in this case for many of the “A Borrowers”).
I want to point out that we are 90 days away from SOMETHING that is going to make home buying more costly and force some renters to stay put. If you are looking to buy, GET MOVING! If you are looking to sell, PRICE YOUR HOME TO COMPEL BUYERS TO MAKE OFFERS. Time is running out. Tick Tock!