what does 5% risk retention mean?
Frank: No nonsense talk on Dodd-Frank | HousingWire
Frank: No nonsense talk on Dodd-Frank | HousingWire
HW: Did you anticipate this sort of push back from the mortgage industry in particular?
Frank: Oh, sure. No one likes to have their profits cut back. On the question of risk retention, I think that is one of the important features of the bill, and Im hopeful there will be no backing down on that. I guess I was a little surprised they would defend the right to make a loan without having to stand behind them. That was so clearly one of the precipitating causes of the crisis, and I was disappointed in that.
HW: Has the pendulum swung too far, though? Will a 20% down payment on the qualified residential mortgage restrict lending too much?
Frank: Theyre not talking about 20% anymore. And thats assuming that securitization is necessary to make loans. We used to make loans without securitizations. And also they must not think theyre making good loans if they cant hold 5%. I think 20% is high, but it has to be. But they arent saying you cant make a loan. Theyre saying if you make the loan youll have to retain 5% of the loss. Do they have so little confidence in their judgments that thats fatal to them?
HW: But does that push too much business to the banks that are large enough to be able to hold that kind of capital?
Frank: No. Again, why is risk retention such a terrible thing? What youre telling me is that these people have no confidence in the loans they make.
HW: Without such a broad securitization market, can the housing market return back to what it was before the overheated bubble?
Frank: Well, it used to be pretty robust without securitization at all. And these bad loans just didnt start in 2005. Again, youre assuming there is no securitization with risk retention. I have more confidence in the market than that. There will be a little bit of a bump. But again, were saying if you make those loans, you should stand behind them. Im shocked at this notion that they have so little confidence in the loans they make that they cant keep even 5% of the risk. And I think that theyll get over it when the demand is there.