Wells Fargo wants borrowers to put down 30 percent on mortgages to avoid a new requirement that will require mortgage lenders to retain five percent of the loan if it’s securitized, according to the WSJ.
This so-called “risk retention” is related to new regulations required by the Dodd‐Frank Wall Street Reform and Consumer Protection Act of 2010.
The goal is to ensure that banks and lenders that write risky mortgages retain some of that risk to promote responsible lending.
Looking for Loopholes
- The very second a new mortgage rule is enacted
- Mortgage lenders scurry to circumvent the rule
- It’s a game of cat and mouse that never ends
- Wells Fargo wants to avoid a proposed risk retention requirement by asking borrowers to put down a whopping 30%
Since the rule was proposed, industry players have come up with a number of ways to seek exemption from the rule.
This includes requiring documentation of income and assets, setting debt-to-income ratio standards, and restricting things like prepayment penalties, balloon payments, and negative amortization.
But Wells wants to take it one step further and ask that both those purchasing and those refinancing have 30 percent down payment/home equity.
Critics (including most other banks and lenders) believe this will lead to a large pool of loans subject to the five percent risk retention rule, greatly increasing mortgage rates.
In fact, the MBA believes rates could be as much as three percentage points higher on loans subject to the rule.
It’s similar to how jumbo mortgage rates exceed conforming mortgage rates because there’s less of a secondary market for the former.
Big Lenders Would Grab Even More Market Share
- A 30% down payment could actually benefit the big banks
- That are able to hold onto home loans long enough to avoid risk retention rules
- It could give the biggest players even more market share
- While hurting smaller non-banks unable to float large loans for more than a short period of time
Some lenders believe Wells and other large banks would grab more market share because they’d be able to keep the loans on their books long enough (two years) to sell them off without being subject to the risk retention.
FHA loan lending would also increase because it’s not subject to the risk retention rule, putting more strain on taxpayers.
However, Wells, who has been the top mortgage lender over the past four quarters, argued that half of all mortgages already carry 30 percent down payments.
Per CoreLogic, the average loan-to-value ratio for mortgages used to buy a home was 84 percent and 69 percent for refinance loans, based on August data, the latest available.
Looks like the originate-to-distribute model is in serious danger, which could translate to higher rates but better quality going forward.
The only worry is the huge foreclosure overhang, which could take all that much longer to clear if down payment requirements and/or mortgage rates rise.