Senator Raises Mortgage Concerns with Dodd-Frank Bill

February 3, 2011 (Jeff Alan)
mortgage-kay-hagan-image
Senator Kay Hagan (D-NC), a member of the Senate Banking Committee, has raised questions with U.S. banking regulators over a provision in the Dodd-Frank Finance Reform Bill that could potentially make it difficult for consumers to get home loans.

Sen. Kay Hagan, (D., N.C.) said in an interview Wednesday that she is “very concerned” that regulators will be too stringent in defining which loans are deemed less risky and therefore exempt from requirements imposed by the Dodd-Frank financial overhaul passed last summer.

One of the provisions in the new law mandates that banks must retain 5 percent of the risk of a loan if it is packaged into securities and sold to investors. The whole idea of the provision is that if banks retained a percentage of risk in the securities that they sell, banks would be more cautious in their lending standards because they would still stand to lose if the borrower defaults.

Joining Hagan were Senators Mary Landrieu (D-LA) and Johnny Isakson (R-GA), who have co-sponsored an amendment to the financial overhaul bill providing an exemption for safe mortgages which in return puts the burden of defining a “safe mortgage” on the regulators.

Without an interpretation on what is a safe mortgage, there is fear within the banking industry that only loans with a 20% down payment or more would be considered a safe mortgage thus receiving an exemption. Most of the lending industry favors a broader definition.

If the definition mandates a high down payment requirement, it could also harm the mortgage insurance industry, which allows borrowers to take out loans with lower down payments by collecting insurance premiums from borrowers.

Critics also fear that banks, trying to avoid having to retain any risk in the securities they sell, will require higher down payments or charge much higher fees and interest rates to borrowers who don’t meet the requirements of a safe mortgage. That could potentially raise the bar so high that many consumers would not be able to obtain a mortgage, which coming out of the current housing crisis could be devastating to the mortgage and housing industry and the economic recovery.

Hagan stated, “I certainly didn’t want to narrow the availability (of credit), which I think there’s a lot of concern about. If you do that, then I think you’ll ultimately have a smaller number of entities that are able to provide those mortgages.”

Tags: senate banking committee, safe mortgages, loans, banks, lenders, credit, banking industry, securities, dodd-frank