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April 15, 2011 at 08:00 PM
A federal proposal that would encourage mortgage lenders to retain more securitization risk could hurt housing sales and prices in the short run but make the housing market more stable in the long run, according to Standard & Poor’s Ratings Services.
A group of 6 federal financial institution regulatory agencies recently proposed that lenders should keep some of the default risk when they put residential mortgages in pools backing residential mortgage-backed securities (RMBS).
The agencies suggested exempting mortgage issuers from the risk retention rule in cases in which mortgages meet certain underwriting criteria.
Issuers could avoid the risk retention requirements, for example, if the maximum front-end ratio for borrowers was 28% and the maximum back-end debt-to-income ratio for borrowers was 36%, S&P says in a comment on the proposed rule.
The maximum combined loan-to-value ratio for “plain vanilla” mortgages that could avoid the risk retention requirements would be 80% in the case of a purchase transaction.
Plain vanilla mortgage borrowers might have to have credit scores of 690 or higher.
