The Community Mortgage Banking Project (CMBP) has told the Senate Banking Committee that the risk-retention provisions contained in the Restoring American Financial Stability Act of 2010 will increase the cost of mortgage credit by potentially as much as three percentage points, according to a JPMorgan Chase study, thus pushing today's 5% mortgage rates to 8%.
The CMBP urged the committee to exempt from risk-retention loans that follow ‘commonsense underwriting standards’ that have been proven to be safe for borrowers and mortgage investors alike. The group sent a letter to committee Chairman Chris Dodd, D-Conn., and Ranking Member Richard Shelby, R-Ala., following the committee action on the bill.
This increase in the cost of mortgages would affect all mortgage borrowers, the CMBP letter stated, ‘…even for borrowers with responsible credit histories seeking safe, stable mortgage products – people and products that had nothing to do with the current crisis.’
The letter went on to point out that the availability of fixed-rate mortgages depended upon healthy securitization markets, which have financed seven out of every 10 existing mortgages. Banks and thrifts do not have the liquidity or the capital to finance the entire mortgage market and cannot hold fixed-rate mortgages in their portfolios because of the short-term nature of their own financing.
CMBP noted that ‘…risk retention is not likely to produce the improved underwriting that it purports to encourage.’ Stating that CMBP members understand the concept of having originators be at risk for the loans they create, because many CMBP members have made good financially for representations and warranties on loans they originated in the 2002-2008 time period, CMBP urged the committee ‘…to consider more direct reform that addresses the underwriting issues head-on, and focuses risk retention only on risky loans.’