Consider this analogy for a moment.
There are two brothers. One brother commits murder and is tried, sentenced and put to death. His brother, who had nothing to do with the crime, is sitting on death row solely because of his relationship to the murderer. The living brother is waiting for a permanent stay of execution or sentence reversal.
The two brothers represent two segments of the mortgage industry: the guilty brother represents the subprime industry, which is now virtually nonexistent. The innocent brother represents the prime loan industry, including independent mortgage lenders.
Subprime lenders have been effectively "put to death" by virtue of the fact that subprime loans are nonexistent in today's mortgage market. Those companies that depended on subprime lending for their livelihood are, for the most part, "dead." Meanwhile, their prime lending brethren are still alive although they are suffering under the weight of enormous governmental and regulatory intervention.
The implementation of certain new regulations (SAFE Act, new good-faith-estimate and truth-in-lending rules and new lending officer compensation laws) have been merely painful. Implementation of flawed qualified residential mortgage policies could be the equivalent of a lethal injection.
And the country's remaining mortgage lenders would not be the only ones to suffer. Most homeowners could not satisfy the lending standards to have their loans exempted from risk retention rules.
There are a couple of recent activities that could improve the plight of the brother on death row. In June of 2011, a letter from 160 bipartisan congressmen requested that regulators rework the risk-retention aspect of the Dodd-Frank Act that would require financial services companies packaging loans into securities to maintain at least five percent of the credit risk. They understand that the measure would put undo burden on the segment of the mortgage industry that remains.
The other (temporary) reprieve is the extension of the comment period on the rule from June 10 to Aug. 1. This gives the industry time to reach out to lobbyists and lawmakers to ensure they hear that the brother on death row is innocent.
OK, metaphors aside, lawmakers need to hear from independent bankers that risk retention for qualified residential mortgages as proposed under Dodd-Frank would kill the mortgage industry.
Here's what the ideal situation should entail: The industry needs a permanent risk-retention exceptions for Fannie Mae and Freddie Mac eligible loans as well as FHA and VA loans and prime jumbo loans.
As an industry, we would be comfortable requiring risk-retention obligations on other loans but, quite frankly, there are none of these "other" loans being made in the marketplace at this time. And, if there were mandatory risk-retention for loans not covered by the exemption, these loans would likely never return anyway!
What is interesting is the GSEs have set net worth levels at $2.5 million but risk-retention legislation without the exemptions mentioned might require small to mid-sized lenders to maintain net worth levels in excess of $50 million! There is not a small-to-midsized lender that I know that could stay in business if these levels were required. In other words, the innocent brother would be executed.
There is hope that devastating outcomes can be avoided. Congressmen need to listen to other suggestions and hear what the mortgage companies plan to do to revive the industry before implementing QRM and putting the entire industry to death.
Scott Stern is the chief executive of Lenders One Mortgage Cooperative.