Will Banks Still Keep Part of Loans They Sell? (and update on bank MBS holdings)

Banks worldwide need to raise $460b or reduce risk-weighted assets by 17% to meet tougher Basel III requirements, according to a Boston Consulting Group study cited in the FT. They need our money, send checks!

But seriously, the H.8 report released by the Federal Reserve recently showed that domestic bank holdings of agency MBS have increased by $27b over the two week period ending on November 30, which brings the YTD growth in bank holdings of MBS to $148b, a significant pickup since the August announcement from the Fed that it is likely to keep overnight Fed Funds near 0% through mid-2013. Add to this volume the recent monthly purchases of around $25b agency MBS by the Fed and it is easy to see why mortgage rates are doing well: supply and demand.

And as for different facet of the relationship between banks and mortgage backed securities, where does the discussion over QRM (Qualified Residential Mortgage) stand?

First, a reminder of what QRM even means…

Under Finreg, banks must retain some risk when selling mortgage loans. These risk retention rules require banks to keep 5% or more of mortgages they sell so they have skin in the game. Earlier this year, regulators started defining which loans constitute “Qualified Residential Mortgages” (QRMs) that are exempt from these risk retention rules.

Since then, the debate is mired in a sea of government agencies. But recently the MBA created a stir by saying the proposed QRM rule may be “fatally flawed.” (The last time I heard that term was from a long-time-ago girlfriend describing our relationship, but that’s another story.)

In written testimony prepared for delivery before a House Financial Services subcommittee, MBA President and CEO David Stevens said that although it is still premature to call for repealing the QRM, “that day may not be far away. Regrettably, the proposed rule, with its QRM definition and creation of a premium capture cash reserve account, is so deeply flawed that we seriously question whether it reflects congressional intent or can ever be successfully implemented,” Stevens wrote ahead of the hearing. The committee is holding the hearing to assess the Private Mortgage Market Investment Act authored by Rep. Scott Garrett, R-N.J. The bill calls for abolishing Dodd-Frank’s risk-retention provisions, among other reforms for the secondary mortgage market.
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Further Reference:
–FT: Banks face €350bn Basel III shortfall
–Banks Must Have Skin In The Game When Selling Mortgages