FHA Loans Exempt from Risk Retention in Financial Regulatory Reform

The financial regulation reform bill that made it out of conference at the end of last week will not require reverse mortgage lenders retain 5% of loans they package and sell if they’re insured by the Federal Housing Administration.  It’s a big win for the industry considering FHA’s HECM program makes up almost all of the production in the marketplace.

Other loans guaranteed by Fannie Mae and Freddie Mac, the mortgage companies taken over by the government, are not specifically exempted in the legislation.

The goal is to allow government agencies to promote lending in the absence of private capital said FHA Commissioner David Stevens.  “The reason why you ultimately exempt the government programs is that we serve this countercyclical role in the market,” he said during an interview with Bloomberg last week.  “The capital has got to be there when the market needs it most.”


While the move promotes companies to originate government backed loans, industry experts worry it could limit the amount of private products in the marketplace since other loans require issuers retain up to 5% of the credit risk.

“Mortgage lending is going to change as a result of this legislation,” said said MBA Chairman Robert E. Story, Jr., CMB in a statement. “There will be increased costs associated and new regulatory burdens that will impact consumers and lenders. As the regulators begin work on the details, during the coming year MBA will continue to push for improvements to ensure a balance is struck between ensuring a safe, robust US financial system, protecting consumers and avoiding negative impacts on credit availability.”

The bill will certainly reduce the amount of money available to consumers and make it more expensive said Jeff Lewis, Chairman of Generation Mortgage in a conversation with RMD late Monday afternoon.  “I think they [lawmakers] have to figure out what they want from the housing market first,” he said.  “Instead they’re increasing regulation which will only limit competition and that is bad for the consumer.”

The compromise bill which made it out of committee last week is expected to go to vote on Tuesday in the House and later this week in the Senate.  The President said he hopes to sign the bill into law by July 4th, but passage of the bill isn’t a sure thing.  In the Senate, Democrats need at least one Republican, and possibly three to get the 60 votes needed.


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  • Sometimes I wonder where we in the mortgage industry have been for the last few years. Regulation can be both good and bad. More regulation of Fannie Mae a few years ago might have chocked off some of the subprime problems.

    Not all regulation is bad. Unnecessary and duplicative regulation generally is. The requirements of this legislation seem doomed to create the latter.

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