Will GSEs Receive Exemption from Risk-Retention Plan?

By Donna Borak

A question posed by Sen. David Vitter last week has sparked fears among investors about what exactly two top administration officials meant when they responded whether the government-sponsored enterprises would be exempted from pending risk-retention requirements. To many, Housing and Urban Development Secretary Shaun Donovan’s statement that there were no plans for any exemption was ambiguous at best, leaving open the question of whether the GSEs will have to hold more capital as a result of the rule or if they will instead be largely unaffected. But the eagerness of the market to parse Donovan’s and Treasury Secretary Tim Geithner’s words at a Senate Banking Committee hearing underlines the anxiety over the forthcoming plan, the potential adverse impact of a narrowly tailored definition of risk- retention and a lack of consensus among regulators about how to move forward with the proposal. To many, it’s clear the GSEs already comply with the risk-retention proposal because they place a credit guarantee on every loan they purchase and securitize. “To me, it’s intuitively obvious that a 100% dollar-for-dollar guarantee is retention of risk,” said Karen Shaw Petrou, managing partner with Federal Financial Analytics. But Shaw Petrou said regulators such as the Federal Deposit Insurance Corp. disagree, viewing the guarantee as an off-balance-sheet obligation that does not necessarily translate into holding higher capital to protect against the risks of the loan. “The logic may be it’s an off-balance-sheet commitment that might not be capitalized,” Shaw Petrou said. “It isn’t good enough. I agree that capital is sometimes not sufficient for off-balance-sheet obligations, but it’s still a dollar-for-dollar guarantee. It’s more robust than holding back $5 for every $100.”