Friday, May 7, 2010

The 5% Fight

If case you haven't heard, the financial reform bill in front of Congress includes updated mortgage lending standards. The issue creating the most buzz over the last few months has been the retention rule which would require lenders to hold 5% of the loans on their books, essentially "skin in the game" for those packaging loans into securities. OUCH!

Of course this rule had banking & real estate groups along with lobbyists up in arms since Q4 '09. There is heated debate on how this piece of legislation will effect available credit and liquidity in the mortgage banking space - which by the way has been the core foundation in stabilizing the nations economy.

Amendments to this bill have been proposed by both Democrats and Republicans alike. One proposal suggests Congress set a 5% minimum down payment requirement, but no retention clause for the banker. Other possible amendments would simply exempt certain products and programs from the retention requirements, think 30 year fixed rate, fully amortizing loans here. Others suggest updating some underwriting guidelines.

In the end, this is a performance/risk issue. Securitizing and selling off high risk loans with little to no performance recourse is what got us in the mess in the first place. Is it better to have the banker retain part of the risk? Or maybe just set the appropriate guidelines? There are many opinions from groups with varying agendas and they're not being shy.

It's clear how the banking industry feels about this, but in the end it's only one groups opinion that matters - and that's Congress.

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