Regulators Push Relaxation of Risk Retention for 30 Year Fixed-rate Mortgage (and Others)

Confounded Interest ^ | 07/26/2013 | Anthony B. Sanders

[whitedog57]

The Dodd-Frank banking bill is slowly unraveling.

“Concerned that tougher mortgage rules could hamper the housing recovery, regulators are preparing to relax a key plank of the rules proposed after the financial crisis (Dodd-Frank). The watchdogs, which include the Federal Reserve and Federal Deposit Insurance Corp., want to loosen a proposed requirement that banks retain a portion of the mortgage securities they sell to investors, according to people familiar with the situation.“

Dodd-Frank required that issuers should retain 5% of all mortgage-backed securities issued without government backing. So, regultors are considering lowering the skin in the game requirement). Congress directed six regulators to specify certain loans—such as traditional 30-year, fixed-rate mortgages—that wouldn’t be subject to the new rules.

So, regulators want to waive 5% retention for the more expensive fixed-rate mortgage, but keep the 5% retention rule for adjustable rate mortgage. The stated reason is that fixed-rate mortgages are less risky than adjustable-rate mortgage.

defaultsfrmarms

frmarm072613

Here is the spread between the 30 year fixed-rate and 30 year adjustable-rate. Note that the spread was negative (ARMs more expensive than FRM) only once since 1999 … and that was at the end of December 2008.

bankrtespred

The percentage of ARMs is now only 6.5%. Here is a chart of the ARM percentage and the FNC house price index since 2000.

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Here is the Fed Funds Target (pink) overlaid on house prices and ARM percentage.

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Finally, here is the average loan size of fixed-rate and adjustable-rate mortgages (convetional).

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At issue now is how to define this so-called qualified residential mortgage.

Also, banks would have to retain 5% only of mortgages that allow borrowers to make “interest-only” payments or for lenders that don’t fully document a borrower’s ability to repay a mortgage. (Note: they still have to meet ability to pay rules from the Consumer Financial Protection Bureau).

So, it seems that Dodd-Frank is slowly unraveling. Let’s see if this helps the housing market in terms of purchase applications.

mbaprchlt071713

[whitedog57]

Dodd-Frank was an AWFUL piece of legislation. But the whole bill should be scrapped, not just parts.

[Colonel_Flagg]

Dodd-Frank was an AWFUL piece of legislation. But the whole bill should be scrapped, not just parts.

Given that the co-authors of the bill to 'fix' the system should both be in prison for their role in helping break it, you are quite correct.

[Salgak]

Of course, by “relaxation of risk” they mean “free mortgages for favored groups regardless of credit-worthiness”. . .