Mortgage Reform Bill May Kill Competition

In testimony today before the House Financial Services Committee the chairman of Mortgage Bankers Association (MBA), David Kittle, says the risk retention provision currently drafted in Mortgage Reform and Anti-Predatory Lending Act of 2009 (HR1728) would make it impossible for many lenders to compete, among other faults. “First and foremost, HR1728 does not establish a national standard for mortgage lending to replace the uneven patchwork of state and local mortgage lending laws,” Kittle told the committee. “We are just as concerned about the requirement that lenders retain at least 5% of the credit risk presented by non-qualified mortgages.” According to Kittle, the suppression of competition will be felt most acutely among non-depository lenders who do not keep significant cash on hand but rather rely on warehouse lines of credit. It is believed most lenders would have to retain the 5% in a reserve fund — an expensive prospect.  This idea would ultimately narrow choices, lessen credit and significantly increase costs to borrowers, according to a statement released by the MBA. Supporters of risk retention argue that firms that are not forced to be on the hook in some form to their lending may be enticed into creating adverse mortgage products. While the MBA maintains a broad support for the bill, in its current form HR1728 would raise costs on broad categories of safe mortgage products, including loans with adjustable rates, as well as fixed 15-, 20-, 25- and 40-year loans, Kittle says. He adds the bill would likely have the same effect on FHA, VA and Rural Housing loans, as well as some Fannie Mae and Freddie Mac mortgages. He also reiterated the MBA’s commitment to ensuring that sound credit options remain available to qualified borrowers and suggested a more flexible set of standards to achieve this, without giving more specifics. Additionally, the American Bankers Association (ABA) called for HR1728 modifications so that banks’ traditional loans to creditworthy borrowers are not curtailed. Speaking to the same committee Gary Berner, executive vice president of First Niagara Bank says any regulation or legislation should promote a return to universal and conservative underwriting practices like those maintained at most banks. Conservative practices must be codified and promoted for all lenders at the same time. At a minimum, legislation must ensure that non-bank lenders comply with the same duties of care as federally regulated banks. “The fallout of the mortgage markets has been very troubling to the banking industry,” Berner said. “It has been primarily the actions of loosely regulated non-bank lenders that have caused tremendous damage for consumers and for the lending industry.” Historically, the ABA embraces amendment from the Federal Reserve to curb subprime excesses and is committed to working with the Fed and other regulators. However, Berner also sounds an alarm on the risk retention provision of HR1728, “which would require the restructuring of much of the securitization market and likely would also require significant accounting changes,” he says, adding that the availability of credit could be curtailed by requiring significant increases in capital requirements in the loan origination process. Write to Jacob Gaffney at [email protected].