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Banks Must Keep Stake in Safest Loans in House Plan

Mortgage lenders would have to keep a financial stake in even the safest loans they offer under a U.S. House plan to amend legislation that would curb risk-taking by financial firms.

Representative Barney Frank, who is leading the House- Senate talks to reconcile the two versions of the bill, today proposed removing the exemption of these loans as part of a package of changes released by his office.

The Senate version of the financial-overhaul bill included an exemption for fixed-rate loans that require proof of a borrower’s income, have a term of 30 years or less, don’t allow deferring payment of the loan principal and have other qualities that shield them from default. The House and Senate versions of the bill require lenders and originators to retain 5 percent of the credit risk on loans they securitize.

The mortgage industry supports the Senate language, saying it would “create greater incentives for good lending without making safe mortgage products more expensive,” John A. Courson, the president of the Mortgage Bankers Association, said in a June 15 letter to members of the Senate and House conference committee.

CDO Rules

The House proposal also would require federal regulators to study and then establish risk-retention guidelines for collateralized debt obligations -- the securities at the center of a Securities and Exchange Commission suit against Goldman Sachs Group Inc.

Goldman Sachs created and sold CDOs linked to subprime mortgages in early 2007, as the U.S. housing market faltered, without disclosing that hedge fund Paulson & Co. helped pick the underlying securities and bet against the vehicles, the SEC said in April. Billionaire John Paulson’s firm earned $1 billion on the trade and wasn’t accused of wrongdoing. The SEC also sued Fabrice Tourre, a Goldman Sachs vice president who helped create the CDOs, known as Abacus.

Frank’s proposal also would require the Treasury secretary to take $3 billion from the $700 billion bank rescue plan and direct it to the secretary of Housing and Urban Development to use in accordance with a 1975 housing assistance law. That law created a standby authority for the HUD secretary to create an emergency program to make loans, advances and emergency mortgage relief payments to homeowners in order to defray mortgage expenses.

Black Caucus

The Congressional Black Caucus fought for the funding when the House considered the bill in December. The provision brought support from members of the CBC, a coalition that made up the votes necessary for House Democrats to pass the legislation.

Frank’s amendment also proposes redirecting $1 billion of Troubled Asset Relief Program funds to the Neighborhood Stabilization Program established in July 2008. The money would provide grants to states, local governments and nonprofit organizations for the purchase and redevelopment of abandoned and foreclosed homes, an idea championed by Representative Maxine Waters, a California Democrat and senior CBC member.

To contact the reporters on this story: Alison Vekshin in Washington at avekshin@bloomberg.net; Phil Mattingly in Washington at pmattingly@bloomberg.net.

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