Dodd-Frank Mortgage Risk-Retention Rule May Reinforce Role of Fannie Mae

By Clea Benson and Lorraine Woellert

Just as the Obama administration seeks to reduce the government’s role in housing, reliance on Fannie Mae and Freddie Mac may be reinforced by a rule growing out of the Dodd-Frank regulatory overhaul.  The Federal Deposit Insurance Corp. and the Federal Reserve yesterday released for public comment a proposed rule requiring lenders and bond issuers to keep a stake in some home loans they securitize.  The proposal would require securitizers to retain as much as 5 percent of an issue if it is based on mortgages whose borrowers have imperfect credit and make down payments of less than 20 percent.  The rule includes a key exemption from those standards: Lenders could avoid keeping a share in riskier mortgages if they get them insured by federal agencies or sell them to Fannie Mae and Freddie Mac, the government-sponsored enterprises now under U.S. conservatorship.  The GSEs and the Federal Housing Administration own or insure more than 96 percent of home loans now being originated. Making their loans exempt from the rule would maintain the government as the main holder of mortgage-market risk, said Karen Shaw Petrou, managing partner of Federal Financial Analytics in Washington.  “If finalized as proposed, which we doubt, the regulation would memorialize U.S. mortgage finance in the hands of Fannie, Freddie and the FHA,” Petrou said. “So much for all the talk about bringing back private capital.”