Many mortgage lenders and securitization sellers generally like the final risk-retention rule and think it will do them little harm in the short run. But others are concerned, especially about the long-term consequences.

Sellers — who preferred the final rule over previous, stricter drafts — still expect it to cut into their business over time. And investor-protection advocates wish it had been tougher.

The single-family market enjoys huge exemptions from risk-retention requirements because of its ties to the government-sponsored enterprises, but it eventually could suffer some ill effects — as, even sooner, could many commercial securitizations.

With those concerns in mind, here are five implications of risk retention that mortgage-market participants should prepare for in their business plans.

1. It Will Affect Most CMBS

The commercial and multifamily mortgage-backed securities market is not as big as the single-family one, but post-downturn CMBS that will be covered by the rule have been flourishing to a larger extent than private-label, single-family MBS that also must comply with it.

"If the risk-retention rule was applied retroactively, it would impact roughly about $600 billion of existing CMBS and about $100 billion current 2014, 2015 and 2016 issuance," said Martin Schuh, vice president of legislative and regulatory policy at the Commercial Real Estate Finance Council. "Luckily we have two years to ramp up and become fully compliant."

Up to two qualified b-piece investors will have to hold at least 5% of securitizations ineligible for the qualified-commercial-real-estate exemption for at least five years. Moreover, they must agree to sell them only to another qualified investor, Schuh said.

"The exemption was not entirely so generous for commercial," he said. "By no means were we meaning to exempt over 90% of the market as was the case for [residential]." The council estimates that less than 4% of loans issued since 1997 would qualify for qualified-commercial-real-estate treatment.

But the final rule is more viable for CMBS sellers than earlier versions, Schuh acknowledged.

"While we would have liked to have gotten more leeway from the regulators, we didn't get everything we asked for," he said. "The good news in the market will continue. The first iteration was looking dicey for CMBS, so we're pleased at the evolution that this rule went through."

2. It Will Add to CMBS Costs

Risk retention will likely increase the coupon on the CMBS loans by an estimated 30 to 40 basis points, according to Schuh.

3. Balance-Sheet Lending Could Grow

"Balance-sheet lenders weren't directly affected by the rule, although I would suspect they would probably have the benefit of an increased book of business because some of the hurdles in the rule drive businesses to a more inexpensive means of financing," Schuh said.

4. No-Equity, Single-Family Loans Could Be Exempt

Home price depreciation that demolished borrowers' equity stakes in homes was a big reason that private-label, single-family residential mortgage-backed securities drastically underperformed in the 2007-2008 downturn, and risk retention was designed to head off such concerns.

Originally the thought was that if regulators required issuers to have some stake in how the loan pool performed, they would be less likely to make bad loans. Restrictions on the loan-to-value ratios generally are the best protection against depreciation.

But the final risk-retention rule as currently written lacks such restrictions.

"There is no restriction on LTV. That is not a low-risk mortgage," said Mark Adelson, a veteran bond market executive and researcher known for his early warnings about mortgage securitization risks. He is now chief strategy officer at BondFactor.

The Consumer Financial Protection Bureau's qualified-mortgage rule (QM) to protect borrowers, a conceptual cousin of the qualified-residential-mortgage exemption from risk retention (QRM), has no loan-to-value restrictions either. However, regulators have said they will periodically consider tighter rules in the future.

However, Adelson is concerned that historically regulators tend to be more reactive than proactive when it comes to credit concerns. So they may not tighten rules until something happens again to warrant it, and it is too late.

The down payment is a key borrower hurdle that government regulators would like to overcome to provide more affordable home loans to underserved borrowers. Adelson supports that aim, but he noted that the potential for high loan-to-value pools without risk retention is still a concern for investors.

Right now most of the securitized, single-family market does not have much to worry about immediately when it comes to risk retention because it is largely controlled by the Federal Housing Administration, Fannie Mae and Freddie Mac, which are exempt from both mortgage rules.

But credit-related exemption standards for single-family remain important because down the road that could change.

5. The Maximum Single-Family Exempt DTI is 43%

The qualified-mortgage rule's maximum 43% debt-to-income ratio for borrowers means an equivalent exemption from risk retention allows borrower leverage to get that high before any risk retention is required, and that limits protection for investors from this risk.

"The scope of the risk retention is going to be very narrow," said Adelson, who would favor a maximum DTI for exemption closer to 36%, more comparable to the conservative industry norms in the 1970s.

But he does not think this will lead immediately to any widespread credit concerns in the market.

"There will be other barriers to having subprime shops with no standards opening their stores on every street corner," he said.

Regulators have agreed only to make the QRM requirements no broader than QM for the time being, but could revisit and tighten them. Fannie and Freddie are slated to lose their QM exemption when they leave conservatorship or on Jan. 10, 2021, whichever comes first, according to a KBW report.

Even with a 43% DTI, KBW estimates that at least 15% of GSE production would not be QM/QRM eligible because of the restriction. And even most of the new single-family securitized market unprotected by government exemptions currently consists of exempt QM/QRM product, according to a KBW.

Jumbo interest-only loans are the exception, but banks are usually pretty eager to fund these so any restriction on securitization would shift more business to them, the report noted.

Credit concerns are being held at bay more by the skepticism of investors burned during the downturn than any regulatory restrictions, Adelson said. But investors will change their minds if other mortgage bonds become too scarce, he said.

When asked about this possibility, KBW researcher Bose George said it is hard to say whether a lack of investors or a lack of volume is the reason private-label, single-family securitization has failed to take off the way commercial securitization has.

"You need a very large investor base, and it isn't there," he said. "I feel like it's a 'chicken or the egg' issue because it's also about creating a large, liquid market where they start coming back."

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