Frank Toughens Criticism of Risk-Retention Opponents

WASHINGTON — Rep. Barney Frank on Tuesday offered a stinging critique of efforts to weaken the requirement that banks hold on to some of the risk associated with the mortgage loans they securitize.

Frank made some of his strongest comments yet in a dispute over risk-retention rules with nonprofit groups that advocate for access to credit for the disadvantaged. He suggested that those groups' efforts to help low-income families may have the opposite effect.

"They are forgetting that a lot of the people they are advocating for were worse off, not better off, when they were allowed to get the loans," Frank said during a speech at American Banker's Regulatory Symposium.

The Massachusetts Democrat, who co-authored the 2010 law that established the 5% risk-retention requirement, is a lonely voice on the side of maintaining strict standards. Allied in the fight to carve out a larger exemption are banks and others in the mortgage industry, in addition to nonprofit groups traditionally allied with Democrats.

He also suggested that many Americans are simply not well-equipped to be home owners.

"I have spent much of my career fighting against excessive inequality," Frank said, citing his progressive bona fides. "But one way not to deal with inequality is to pretend it doesn't exist."

Later, in response to a question about the future of Fannie Mae and Freddie Mac, he further distanced himself from progressives who want the government to support homeownership for disadvantaged families.

"I would like all the loans made purely on a market basis," Frank said. "I don't want any social basis…"

Federal banking regulators have proposed rules that would spell out some of the details of the risk-retention mandate, including a definition of high-quality loans — known as qualified residential mortgages — that would be exempted. Among the proposed requirements is a 20% down payment.

The proposal sparked a sharp backlash. Though Frank agrees a 20% down payment requirement would be too high, he said that the much of the criticism boils down to the idea that regulators will stop bad loans from being made. That view places an unjustified level of faith in the regulators, Frank said.

"If you do not build into the lending process better incentives against making bad loans, all the regulators in the world are not going to clean up that business," he said.

Frank acknowledged that he made some past errors in the housing arena, saying that he was too late to see certain problems at Fannie Mae and Freddie Mac.

But Frank said that he was a longtime opponent of the mantra, championed by Fannie and Freddie, that every American should be able to own a home.

The risk-retention proposal would exempt loans made by Fannie and Freddie, as well as those made by the Federal Housing Administration. Those exclusions have drawn criticism from opponents of a strict risk-retention requirement.

Frank said that he believes that Fannie, Freddie and FHA loans should be covered by the risk-retention rules.

Later, in response to a question about reform of Fannie and Freddie, Frank blamed the current gridlock on House Republicans.

Some Republicans on the House Financial Services Committee believe that the government needs to turn over mortgage lending almost entirely to the private sector, while others agree with Democrats that there needs to be some form of government guarantee, he said.

"The Republicans in the House on our committee are torn between their ideology and reality," Frank said.

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