Mortgage finance industry executives sent an open letter on Tuesday, December 21st, to regulators asking them to adopt national standards for the securitization of home loans as soon as possible, starting with the disclosure and risk retention rules outlined in the Dodd-Frank Act.
The market participants said regulators "must develop new standards for the secondary market in mortgage loans" that promote a sustainable securitization market. The new definition of what is a qualified residential mortgage "should be the gold standard in all areas" of origination, securitization, servicing, and disclosure.
"The private residential mortgage securitization market is frozen as to new issuance. The housing market is suffering from a dearth of credit, which is causing a serious lack of confidence among potential homebuyers," the letter said.
"Problems of this magnitude are a threat not only to the economic recovery, but to the safety and soundness of all insured depository institutions. Banks rely upon a functioning secondary market in home mortgages for liquidity management purposes. The chaotic situation in the mortgage market today demands immediate action to ensure all parties are treated fairly and to restore the confidence needed to support a recovery in real estate markets and the entire U.S. economy."
The letter set out 11 recommendations to protect borrowers and investors, including making lenders accountable for lost paperwork on loan modifications and for failing to suspend the foreclosure process during the loan modification process.
The signers also recommended mitigating losses on residential mortgages by taking action to maximize the net present value of the mortgages to the benefit of all investors in a securitization, rather than a particular class of investors.
Liability concerns and securitization issues have been holding servicers back from approving mortgage modifications and short sales.
"Servicing standards need not be overly complex, but they must address the misaligned incentives and 'tranche warfare' issues that have bedeviled mortgage servicing throughout this crisis," said in the letter.
The open letter was sent to the heads of the Treasury Department, the Federal Reserve, Federal Deposit Insurance Corp., Securities and Exchange Commission, Federal Housing Finance Agency, and Comptroller of the Currency.
The 52 people who signed the letter urged the regulators to act quickly, because of the robo-signing scandal and other issues currently plaguing the mortgage finance industry.
The signers included Thomas Day and Leslee Luedke Martin, both of the Professional Risk Managers International Association; Martin Mayer of the Brookings Institution; Harold Simon of the National Housing Institute, Alan Mallach of the Center for Community Progress; Allan Mendelowitz, former chairman of the Federal Housing Finance Board; NYU economics professor Nouriel Roubini; among others.
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