Dodd Frank’s Risk Retention and Mortgage Lending

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In 2014, up and coming mortgage reform was on everyone’s mind.  The likely passing of Dodd Frank would have a far reaching impact on mortgage lending and consumers.

Dodd Frank’s Risk Retention Proposal

Risk Retention was a part of Dodd Frank.  It was easily among the most debated segments of the lengthy legislation and understandably so.  It required that mortgage lenders keep a portion of all new mortgage loans where down payment was less than 20% on deposit.  The proposed amount was 5% of the total loan amount.  For example:

  • Home Price: $200,000
  • Down Payment: 5% down payment
  • Loan amount: $190,000
  • Amount to be kept on deposit by lender: $9,500

Unintended Consequences of Risk Retention Proposal

With regard to Risk Retention, there are 2 types of lenders.  First, you have depository lenders.  This category includes lenders such as Wells Fargo, Chase and Bank of America.  Then, you have non-depository lenders.  These lenders specialize in mortgage lending.  In addition, non-depository lenders provide several benefits depository lenders may not.  For example, non-depository lenders provide:

  • Improved product selection
  • Better pricing
  • Faster loan process turn times
  • Underwriting flexibility
  • Personal service

Depository vs. Non-Depository Mortgage Lenders

Due to the fact that non-depository lenders focus solely on mortgages, they have less cash on deposit than depository lenders.  Depository lenders can increase their cash deposits as a result of offering checking and savings accounts.  As a result, Risk Retention limits a non-depository lender’s objectivity.  For example, imagine that a non-depository lender is considering 5 mortgage applications for $400,000 each.  $20,000 of the lender’s money is at risk due to originating a $400,000 mortgage.

As a result, the non-depository lender chooses to lender to applicant #1.  After-all, they are the most qualified of the 5 applicants.  Meanwhile, all 4 other applicants were also very qualified borrowers.  However, based on depository requirements the lender’s limitations exclude the other 4 applicants from being approved.

Too Much Regulation is Too Much

Mortgage lenders already face increased regulation as a result of Dodd Frank.  For example, the Ability to Repay section of Dodd Frank changes mortgage lending as we know it.  In fact, Ability to Repay creates massive accountability where before there was none.  However, Risk Retention on the other hand would simply add restrictive over-regulation.

By Jeremy House

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