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» Rolling with the New Rules On the regulatory front, the passage of critical rulemakings required by the DoddFrank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) will also support increased mortgage investor confidence. Specifically, the Ability to Repay/ Qualified Mortgage (QM) and Risk Retention/ Qualified Residential Mortgage (QRM) rulemakings to be enacted by the Consumer Financial Protection Bureau (CFPB) and other regulators will redefine the mortgage lending space. The majority of mortgage loans will have to conform to these standards. The rules will require increased underwriting and scrutiny on top of already increased underwriting and scrutiny and will add to the legal liability to which lenders are exposed. Private market investors are likely waiting on the sidelines to see how these rules, particularly QM and QRM, are finalized before engaging in new investment. When the rules were originally proposed, the QRM rule received most of the attention, but it appears now that the media, the industry, and Congress have turned their eyes to the QM rule. A July House Financial Services Committee's Financial Institutions and Consumer Credit Subcommittee hearing, titled "The Impact of Dodd-Frank's Home Mortgage Reforms: Consumer and Market Perspectives," showed a peaked interest from lawmakers regarding the Ability to Repay/QM rule. Rep. Shelley Moore Capito (R-West Virginia) expressed her support for a safe harbor QM construct. Rep. Bill Huizenga (R-Michigan) cited his recent bill, H.R. 4323, the Consumer Mortgage Choice Act, to amend the points and fees restrictions under the proposed rule. And Representative Stephen Fincher (R-Tennessee) voiced concerns about the rule's impact on affordable manufactured housing. Industry trade association responses to the CFPB's extended comment period for the Ability to Repay/QM rule underscore the significance of the rulemaking. The Mortgage Bankers Association (MBA) partnered with Ballard Spahr partner Richard J. Andreano Jr. on its recent comment letter and in preparing a memo on the litigation costs and risks associated with the rule. In speaking with Andreano, he cautioned that "the Ability to Repay/QM rule has the potential to significantly constrain the secondary market." Under the statutory language, borrowers can bring a claim against an investor at any time during the life of the loan, regardless of the three-year statute of limitations, Andreano said. Consumers bringing such claims are eligible for actual damages, regular statutory damages up to $4,000, all charges and interest paid by the consumer, and attorney's fees and court costs. "That can be a big number because you can have up to three years of interest," Andreano said. MBA's comment letter also asserts that while it may be uncommon, a plaintiff's attorney may claim loss of equity within actual damages. And while the way the rule is currently written, it doesn't appear that borrowers could bring affirmative claims against investors, some investors may have to pay to litigate this test in court (affirmative claims against the creditor are clearly allowed). MBA argues that given the risks posed by the QM rule, a safe harbor is essential to limit the claims brought by borrowers to a specific set of factual, objective issues. If the QM is structured as a rebuttable presumption or "allows borrowers to basically assert any facts, even if the loan is a QM, the fear is that the risk of significant litigation will have a significant and negative effect on the secondary market," according to Andreano. Whereas if the QM is structured as a safe harbor, it will limit the negative impacts on the mortgage investment market and will likely incent lenders to originate loans to higher standards. For this reason, a safe harbor QM will better ensure the revitalization of the private mortgage market. The return of private capital will hopefully allow low- to moderate-income families to afford private credit again, specifically housing credit outside of FHA, and will also decrease industry reliance on the GSEs. This may open the door for more meaningful housing finance reform and allow us to finally address the two big elephants in the room. Rehashing Reform, Restoring the Dream Notably, however, reopening the housing reform debate may bring new uncertainty of its own to the mortgage industry as even the direction of the reform is still largely undefined. The tick-tock of the GSEs' rise and fall has been covered ad infinitum. Industry advocates and trade associations differ on whether to combine the GSEs into one institution to avoid duplication or break them into smaller entities similar to the Federal Home Loan Banks. President Obama and the Treasury released the administration's plan to reform America's housing finance market in February 2011. The document explored the options advocated by the industry, but it lacked practical, concrete VISIT US ONLINE @ DSNEWS.COM solutions to wind down the multitrilliondollar entities. The industry, the public, and Washington still face a litany of questions. While I don't profess to know the right answers to all these big questions, I do know that as an industry, we have a very large task at hand. The questions around the government's future role in housing finance and how to strike the right balance between private and public responsibilities remain from the days when I was FHA commissioner. Of note, key areas beyond personnel will need to be addressed as the future might mean a move to one remaining GSE or possibly even joint receivership. In particular, there is serious consideration of assigning certain functions, which are redundant to both, to one or the other, including their massive automated underwriting systems. For one, default management is an area where the GSEs have developed competencies and expertise that could stand alone as separate operating businesses—even profitable ones. The same holds true for both GSE multifamily units, where the pipelines remain robust and profitable. For example, in an attempt to "improve liquidity" for GSE securities, there is discussion about eliminating one of the two and having a common issue. Industry insiders tend to favor Fannie Mae's MBS over Freddie Mac's Participation Certificates. Reportedly, industry trade associations—including the MBA, the Securities Industry and Financial Markets Association (SIFMA), and the American Securitization Forum (ASF)—are in discussions with FHFA over this issue. Concurrently, there is discussion about merging other common functions. Real estate owned (REO) property management and oversight is one of these, and the conventional wisdom seems to favor Freddie Mac. As to who wins and who loses, a reading of the recent FHFA report to Congress seems to give Fannie Mae a slight edge. In the report, Fannie Mae received an upgrade in one of the rated performance areas. A shared risk area in the report attempted to comment on the enterprise risk related to human capital. In this area, both were deemed to be in peril. This is the one area, in the public record, where the new leadership can bring about change, and immediate attention is warranted. A common theme that seems to emerge is eliminating duplication in toto. For close to four years, various mortgage industry stakeholders have questioned the need for both GSEs—up to and including their own executive leadership. 53

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