Federal Regulators Publish Final Risk-Retention Rule
Most of the securitized single-family market is currently exempt, but only a tiny part of the commercial equivalent is. However, nonexempt commercial will get more expensive to issue, and the single-family exemption could change.October 23
Federal regulators formally issued a final risk retention rule for mortgage securitizations, a long-awaited and hotly debated measure that is nevertheless expected to have little market impact when it takes effect a year from now.
The risk-retention provision of the Dodd-Frank Act of 2010 calls for issuers of mortgage-backed securities to retain 5% of the credit risk. This provision was designed to ensure the issuer has "skin in the game" and is penalized if the securitized loans go bad. But federal regulators, under pressure from Congress and industry groups, watered down the Qualified Residential Mortgage rule so that all government-backed loans and Qualified Mortgages are exempt from risk retention.
"Given the alignment of QRM with QM rules, as well as the rule's exemption for government-backed loans, we do not expect the risk retention rule to have a material impact on near-term originations," said Isaac Boltansky, an analyst at Compass Point Research and Trading.
"Over the longer-term, we view the finalization of the QRM rule as a positive for the mortgage finance landscape as it provides meaningful operational clarity which should ultimately lead additional capital to come off of the sidelines," Boltansky said.
However, the QRM risk retention rule could have an impact in the securitization of non-QM loans such as jumbo loans that are repackaged in the private-label market. But such impact won't be immediate, because the rule does not take effect until Dec. 24, 2015.
The risk-retention rule also covers other asset-backed securities such as auto loans and student loans. But the effective date of those provisions has been delayed for two years until Dec. 24, 2016.