Former Rep. Barney Frank is calling foul on federal regulators for gutting new mortgage securities rules enshrined in the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank).
A key clause in the law requires mortgage-backed bond (MBB) issuers to retain at least a 5% credit risk in the securities they sell. In 2011, the housing and lending industries lobbied successfully for a narrow exemption to the 5% risk retention rule for mortgage securities backed by a category of low-risk loans, dubbed qualified residential mortgages. The original proposal defined a qualified residential mortgage as a loan made to highly qualified borrowers who put at least 20% down.
Since then, lenders and short-sighted real estate unions have succeeded in watering down the proposal to create an exception for nearly every loan made today.
Mr. Frank has joined the backlash against these recent developments. In a letter earlier this week, Frank stated:
“If all of these people were correct in their collective judgment, we would not have had the crisis that we had, [. . .] More importantly, what their arguments reflect, and what I believe unfortunately is carried over in proposal, is the view that things must always be exactly as they are today.”
What’s often interpreted as greed on behalf of Wall Street bankers and housing industry leaders is often simply fear. The manifold changes found in Dodd-Frank are unquestionably reasonable and maybe even wise. But the problem is that change in general introduces uncertainty into the equation. And uncertainty means risk.
It is this basic fear of risk that consumes all parties involved, including end-user homebuyers. It has led to the culture of non-responsibility, in which lenders wash their hands of loans made, and homebuyers eschew a financial stake in their home purchases. This is precisely why it is the government’s role to ensure certain precautions are taken as a matter of law.
Financial regulators exist to force individuals and entities to accept their share of market risk. Period. This aspect of Dodd-Frank does just that. Leave it alone.