Lawler: Regulators have gutted ‘skin in the game’ requirements

Regulators are bowing to real estate and mortgage industry lobbyists in Wednesday’s proposal that would effectively eliminate the risk-retention rule of 2011’s Dodd-Frank Act — which would align the interests of lenders and investors in mortgage-backed securities —¬†wrote housing economist Tom Lawler in a piece presented on the finance and economics blog Calculated Risk.

By conflating the meaning of qualified residential mortgages (QRM) and qualified mortgages (QM), the six agencies tasked with implementing the “skin in the game” rule of the Dodd-Frank Act will ensure that “the risk-retention requirement for private-label residential mortgage-backed securities, which was very explicitly designed to better align the interests of issuers/originators and investors, will effectively be gone.”

When they came out, the recommendations for QRMs, which were mortgages that were to be considered so low-risk that lenders wouldn’t be subject to retain the 5 percent stake in them that the Dodd-Frank Act called for, were so understandably stringent — with rules like requiring a 20 percent down payment and a debt-to-income ratio of no greater than 36 percent — that the shocked real estate and mortgage industries had their lobbyists work to eliminate the QRM, which the proposal does, Lawler wrote.

“That may not be bad,” he concluded, “in that it was not clear if a 5 percent risk-retention requirement would really alter behavior.”

Source: Calculated Risk