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“Don’t keep two measures at hand.”
Deuteronomy 25:14-16
News reports suggest that the banking industry is seeking ways to avoid one of the more ill-considered aspects of the 2010 Dodd-Frank Wall Street Reform legislation, namely Section 941 of the law dealing with “risk retention” on mortgage securities. Nick Timiraos and Alan Zibel of The Wall Street Journal report that regulators:
“[A]re concerned that tougher mortgage rules for banks could hamper the housing recovery. The watchdogs, which include the Federal Reserve and Federal Deposit Insurance Corp., want to loosen a proposed requirement that banks retain a portion of the mortgage securities they sell to investors, according to people familiar with the situation.”
I wrote a long and fairly technical comment on Section 941 of the Dodd-Frank law in Zero Hedge earlier this week, “Dodd-Frank, True Sale & Skin in the Game (Update 1).” For those of you who live outside the world of finance, what you need to know is that Dodd-Frank is hurting the housing market by imposing unreasonable economic limits on the world of private mortgage securities.
Section 941 of Dodd-Frank is essentially a tax on issuers of private mortgage bonds, an economic penalty on private issuers of securities to support housing finance. The rule was put in place because nobody in Washington has the guts to enforce the securities laws or go after blatant acts of fraud against investors. The Dodd-Frank law requires the Fed and other regulators to set rules for “qualified residential mortgages” that don’t require risk retention, essentially the part of the market that is dominated by the US government housing agencies.
Net, net, Section 941 of Dodd-Frank kills the market for private mortgage securities.
One former staffer who worked on Section 941 opines: “[The Qualified Residential Mortgage rule] is likely the most mindless part of Dodd-Frank. In all the time I worked on the bill, I never heard a sound reason for “skin in the game” – just simplistic platitudes from proponents who had no background in the area. It was clear from the outset that it could never be effectively implemented.”