How Dodd-Frank Made Mortgage Market Playing Field More Lopsided

These days, most people agree that the U.S. government played too significant a role in the mortgage market leading up to the housing bubble. Consequently, you would think that the new financial regulation bill would seek to limit its influence on the industry. You would be wrong. On the contrary, not only did it fail to rein in the GSEs, but it gave the FHA a distinct advantage, as pointed out by John Carney in an excellent op-ed today. He notes that the Dodd-Frank bill requires banks to retain 5% risk in all mortgages they securitize. But the same doesn't go for the FHA:

Mortgages guaranteed by the F.H.A., however, are exempt from the 5 percent risk-retention requirement. This means that lenders will find that it costs far more, and involves more risk, to offer mortgages they back themselves than those covered with a guarantee from the agency. There's little doubt this will lead to a huge increase in the volume of business done by the F.H.A., as banks creating securities will seek out mortgages on which they don't have to cover the risk. Purely private mortgages will quickly be pushed out of the market.

Carney says the industry expects Fannie and Freddie to also get the exception, which would be disastrous.

Read the full story at the New York Times.