The newly passed Frank Dodd Bill has a risk retention rule that states anyone originating a home loan must retain 5% in reserves against that loan. Basically Congress is requiring lenders to put a little more skin in the game. This sounds like it makes sense, but let’s take a closer look at what this might mean for the market and for homebuyers.
First of all, this rule applies to conventional loans only, not government insured loans (FHA, VA or USDA). The majority of loans written in the US are conventional, especially loans with a down payment of 5% or more. This new rule would force some lenders to stop offering conventional mortgages altogether which could in effect force more mortgages to go FHA. This is not good for the US taxpayer because FHA loans have a higher delinquency rate and the program loses money.
An amendment to the bill allows mortgages that fall under certain guidelines to be exempted from the 5% risk retention. These are called QRM or qualified residential mortgages. The problem facing us is that what “qualifies” a mortgage loan to be exempted has not been determined and Wells Fargo has written a letter to 6 Federal regulators saying that the standard should be only loans with a 30% down payment or greater.
If this is adopted as the standard it will basically mean most mortgage lenders in the US will stop offering conventional loans because almost no one can afford the 5% risk retention. Lenders do not typically make 5% when they originate a mortgage loan, so basically every loan a lender would write would cost them money until the loan was eventually paid off.
So, why would Wells Fargo write this letter? Because they are one of the only lenders in the world large enough to actually handle this and by doing they could gain a significant advantage in the market and maybe even drive some lenders out of business… real nice!
Will the consumer win? No… Because if one or two banks have a monopoly on a certain loan type do you think the pricing will better or worse? Do you think closing will take longer or be quicker? There is absolutely no scenario under which this works out well for the industry, the market or the consumer.
Olan Carder Loan Officer NMLS# 97565 Phone: 980-721-7478 ocarder@1asmc.com www.charlottemortgageonline.com
Any legislation originating with the names Franks and Dodd is destined to turn into a full-blown disaster. Those two clowns are complicit in the real estate crash but now propose to ‘fix’ it. No thanks, fellas. Really….you’ve done enough.