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In its Aug. 1 comments on the Credit Risk Retention rule proposed jointly by six federal agencies in March, NAHB suggested that the regulators should go back to the drawing board to come up with a plan for mortgage lending that would not hinder the housing recovery that is slowly beginning to materialize.
Drawing the most concern from home builders are the rule’s proposed underwriting standards for a qualified residential mortgage (QRM), which would be exempt from a requirement in the Dodd-Frank Act passed last summer for loan originators and securitizers to hold at least 5% of the credit risk of a mortgage between them.
Loans that don’t meet the QRM standard would be significantly less favorable for borrowers than those that do, NAHB said, which would seriously disrupt the housing market by making mortgages unavailable or unnecessarily expensive for many creditworthy borrowers.
Under an unduly narrow definition, QRMs would require a 20% downpayment, impose very conservative debt-to-income ratios and be limited to borrowers with sterling credit histories.
NAHB has also joined with a diverse coalition of more than 40 consumer organizations, civil rights groups, lenders, real estate professionals, insurers and local governments in developing a white paper that presents a thorough analysis of the impact of the proposed definition of a qualified residential mortgage on the fragile housing market.
The coalition submitted this paper as a comment letter in which the regulators were urged to redesign a QRM so that it encourages sound lending behaviors that support a housing recovery, attracts private capital and reduces future defaults without punishing responsible borrowers and lenders.
The proposed rule includes requirements on Qualified Commercial Real Estate (QCRE) loans that would be virtually impossible to meet and would have a wide-spread and detrimental impact on financing the development of multifamily and commercial properties.
Commercial mortgage-backed securities that consist of QCRE loans would not be required to meet the 5% risk retention rule, and therefore would have more favorable financing terms.
NAHB told the agencies that the QCRE underwriting standards should be realistic and achievable and provide for a reasonable share of the commercial mortgage-backed securities market.
In the short term, the agencies proposing the credit risk rule have determined that Fannie Mae and Freddie Mac already meet the proposed risk retention requirement, and, therefore, loans sold to Fanie Mae and Freddie Mac will not be included in the risk retention requirement while they remain in conservatorship with explicit backing from the federal government.
This should cushion the blow from the proposed rule on the residential mortgage market and multifamily development.
In its comment letter, NAHB voiced concern “about the immediate impact this proposed rule will have at this precarious point in the economic recovery and the future implications of overly restrictive rules on future growth of the housing market and the entire economy.”
NAHB urged the agencies “to take the time to carefully craft these new regulations so as not to have a negative impact on residential and commercial real estate financing,” noting that residential investment and housing services have historically accounted for an average 17% to 18% of the gross domestic product.
“There is no denying that housing is a large portion of the national economy, and reworking the entire housing finance market should not be taken lightly,” NAHB said. “With so much at stake, these regulations should not be rushed.”
On July 22, NAHB also provided comments on the Federal Reserve Board’s Regulation Z – Truth in Lending proposal, which would implement statutory changes made by the Dodd-Frank Act to provide consumer protections for mortgages.
The proposal expands the Truth in Lending Act’s ability-to-repay requirement to cover any consumer credit transaction secured by a dwelling.
In addition, the proposal would establish a qualified mortgage (QM) standard for complying with this requirement.
Of the two alternatives proposed for meeting the QM standard, NAHB urged the regulators to establish a bright line safe harbor to define the QM to best ensure safer and well documented and underwritten loans without limiting the availability of credit or increasing the costs of credit to borrowers.
The comment letter stresses a QM safe harbor definition that promotes liquidity by providing consumers stronger protections than currently proposed by the Fed and provides lenders definitive lending criteria that reduce excessive litigation exposure.
NAHB also expressed concern over a provision in the proposed rule that would exclude builders from an exemption enabling seller-financing for the sale of a home to be provided on more than three properties in any 12-month period.
The economic impact of restricting seller financing would be severe, NAHB said, and it said that any final rule should contain a small business exception for builders.
NAHB worked with its members and many other industry stakeholders as it analyzed the impact of the enormoulsy complex QM rule on housing finance.
The responsibility for issuing a final rule has been transferred to the new Consumer Financial Protection Bureau, which officially opened for business on July 21.
For more information, email Steve Linville at NAHB, or call him at 800-368-5242 x8597.