North Carolina Senator Hagan talks about the bipartisan amendment she and two other senators got added to the Dodd-Frank Act to create a Qualified Residential Mortgage exception to the risk-retention rule.
Mortgage Banking
July 2011
By Robert Stowe England
Sen. Kay Hagan (D-North Carolina) a member of the Committee on Banking, Housing and Urban Affairs, was elected in 2008, defeating Republican incumbent Elizabeth Dole, who had served one term.
Hagan was born in Shelby, North Carolina. Her father was a tire salesman who moved his family to Lakeland, Florida, where Hagan spent most of her childhood. During their time in Lakeland, her father was elected mayor of the city.
Hagan’s mother, born Jeanette Chiles, was the sister of Lawton Chiles, who was a U.S. senator before being elected governor of Florida. Hagan engaged in her earliest political activity as a child, when she placed bumper stickers on cars for her Uncle Lawton.
Hagan graduated from Florida State University, Tallahassee, Florida, and earned her J.D. degree from Wake Forest University School of Law in Winston-Salem, North Carolina. She spent 10 years working as a banker for North Carolina National Bank (or NCNB, which became NationsBank in 1991). NationsBank, in 1998, acquired BankAmerica Corporation and the merged banks today are known as Charlotte, North Carolina-based Bank of America.
Hagan was first elected to the North Carolina General Assembly in 1998 as state senator for the state’s 32nd district in Guilford County, including most of Greensboro. When she campaigned, her Uncle Lawton walked the district with her.
In the U.S. Senate, Hagan serves on the Banking committee and the Committee on Small Business and Entrepreneurship, which is headed by Sen. Mary Landrieu (D-Louisiana), who was a co-sponsor of Hagan’s Qualified Residential Mortgage (QRM) amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010.
The other co-sponsor of the QRM measure was Sen. Johnny Isakson (R-Georgia), who is also the former president of Northside Realty, an Atlanta-based firm that became the largest realty company in the state.
Sen. Hagan sponsored the QRM amendment because she was concerned that the proposed risk-retention language contained in Dodd-Frank would restrict origination volume and raise the interest rates on mortgages for well-qualified borrowers. The amendment passed the Senate by unanimous consent on May 12, 2010.
After regulators began to put together their proposed definition of the risk-retention rule for securitizations, Hagan and her two co-sponsors became concerned that the rule was not following the clear intent of the QRM amendment she sponsored. She worried that federal regulators were going to write a very narrow QRM definition by limiting the exemption to mortgages with a 20 percent down payment--and even higher for refinanced mortgages.
Hagan, Isakson and Landrieu first wrote to the regulators on Nov. 8, 2010, to express their concerns. Their letter stated:
“Applied across the board, risk retention could raise the cost of mortgage credit even on well-underwritten loans to highly qualified borrowers,” the senators wrote to the heads of six regulatory agencies tasked with coming up with the implementing regulations for risk-retention.
“With our amendment, the deterrent value of risk retention is focused where it should be--on lax underwriting standards and risky product features rather than on all residential mortgages,” the trio wrote.
“Prior to sponsoring the amendment, we were provided with analyses of loan-level data that demonstrated that loans that satisfy the elements set out our amendment default less frequently and cure more often than riskier loans,” the senators wrote.
The senators explained to the regulators, “for loans with lower down payments that have combined loan-to-value [LTV] ratios greater than 80 percent, the protections provided by mortgage insurance result in lower losses for lenders and investors, and fewer foreclosures for borrowers than similar loans that lack insurance.”
After sending the letter, the senators continued to be concerned that the regulators were going to issue a narrow definition of the QRM. They wrote to them again on Feb. 16.
“We are concerned that efforts to impose a high down-payment requirement for any mortgage to meet the QRM exemption standard would be inconsistent with out legislative intent,” the senators wrote. “The purpose of the QRM is to support a housing recovery by creating a robust underwriting framework that will attract private capital to support responsible lending and borrowing.”
The senators also wrote, “The QRM framework set forth in the statute specifically contemplates the inclusion of low-down-payment loans, provided they have mortgage insurance or other forms of credit enhancement, to the extent such insurance or credit enhancement reduces the risk of default.”
Opportunities to further make the case for a broader definition for the QRM were increased after regulators extended the original deadline to August 1. It was originally set for June 10.
Mortgage Banking caught up with Sen. Hagan in her office on Capitol Hill recently to ask her about regulators’ interpretation of the QRM exemption, as well as the original thinking behind the amendment.
Q: Last year during the financial reform deliberations in the Senate, you decided to propose an exemption to the risk-retention rule for securitizations for a Qualified Residential Mortgage. What prompted your concern at that point?
A: I was very concerned about the [level] of interest rate that a borrower would have to pay. I know that, from a risk-retention perspective, what I was really worried about was how many people in the middle market would no longer be able to afford that first home.
Really, the goal of the amendment was to exempt certain highly underwritten loans from the requirement of risk retention and to ensure that we did not inadvertently drive up the cost of mortgages for well-qualified homebuyers.
Q: Of course, mortgages that are securitized and subject to the risk-retention rule are going to cost more--that is, the ones that fall outside the definition of the QRM.
A: Exactly. What I want to be sure [of] is that people can qualify for a Qualified Residential Mortgage [without a] 20 percent down payment [and still have] a lower interest rate.
Q: You were able to find other members of the Senate who were similarly concerned. How did that come about? How did you manage to locate your key co-sponsors for the amendment?
A: I think what is critical in this is that it was a bipartisan amendment. We had Johnny Isakson and I spoke with him frequently, as well as Senator Mary Landrieu. And we worked together to include this amendment, which is a common-sense approach. It’s bipartisan. We put it in the Dodd-Frank law. The purpose of the amendment was to ensure that new regulations would not restrict the availability of credit to well-qualified homeowners.
Q: Did you face any serious opposition in getting the QRM carve-out into Dodd-Frank, and did you find any important allies?
A: I think anytime you do an amendment on a bill, like the Dodd-Frank bill, you have to work across the aisle to get it in. We worked as Democrats and Republicans on this bipartisan amendment, and it passed the Senate by unanimous consent. Clearly, we had strong support.
Q: And you had support from a number of constituencies, too--from bankers to consumer advocates.
A: We did.
Q: Which, I guess, was important in terms of the bipartisanship.
A: It was. Because anytime you want to get an amendment done, you need a lot of different folks coming to the table to support it. And I think that’s what helped get broad support across the Senate.
Q: What sort of mortgages did you envision being excluded from the QRM?
A: Well, I think on the QRM, we didn’t intend for our exemption to be as narrow as what I am currently seeing in the proposed regulations. And I think there are many features of our [concept of a] QRM definition that go beyond just the down-payment focus--and that is, I wanted to be sure the documentation and verification of a borrower’s financial resources was taken into account, standards regarding residential income and debt-to-income ratios. We wanted to be sure that there would be prohibitions on balloon payments, negative amortization, prepayment penalties, interest-only payments and other features that increase the risk of a borrower defaulting on their mortgage.
Q: I know that payment-option adjustable-rate mortgages [payment-option ARMs] have turned out to be quite toxic in the aftermath of the housing bubble, and of course those would not be included in this definition.
A: Exactly. And we’re looking at the fact that the loans that we would envision under the QRM were not the impetus of the financial meltdown.
Q: Did you and the co-sponsors have any conversations with the regulators as they were preparing the proposed risk-retention rule that triggered your concerns that they were going to propose the 20 percent down payment? I did get copies of your Nov. 8 and Feb. 16 letters.
A: You know, I would hear things going on but I never spoke directly to the regulators. And then we sent the two letters showing our concern [and] where we were outlining the intent behind the amendment. And we certainly asked questions at subsequent banking hearings.
Q: And this was ahead of rule proposal?
A: Both before and after the rule proposal. For example, Senator Isakson asked questions of [Federal Deposit Insurance Corporation Chairman] Sheila Bair when she was testifying [March 3], during the rule-writing process, and she asked for more data on the performance of loans with mortgage insurance, which Senator Isakson was going to provide.
Q: So, there should be no doubt that you sufficiently communicated the intent of the legislation.
A: Correct. And that’s what we explained in our letters.
Q: You sent two letters out and asked questions in hearings, and yet on March 31, the proposed rule comes out with the 20 percent down payment. What did you think of that?
A: When the proposed rule came out March 31, it was a very rigid standard, in particular the down-payment requirement of 20 percent--that went a lot farther than a lot of members who supported the provisions thought it would go.
Q: Did you think that went beyond the intent of the statute?
A: I most definitely think it went beyond the intent of the statute, as do Johnny Isakson and Mary Landrieu.
Q: There could be no doubt, it would seem to me, that you clearly communicated the intent of the QRM exemption was not to have a 20 percent down payment. And yet the regulators proposed a 20 percent down payment anyhow.
A: Really, it is in contrast to our expressed intent. And despite repeated warnings from other members of Congress in addition to us, repeated warnings from consumer groups, from bankers, I think the regulators crafted a very narrow definition that will unnecessarily slow the housing market recovery. It’s going to increase costs to the otherwise well-qualified homebuyers and it’s going to dampen the incentives for sound underwriting.
The 20 percent down payment, if this goes through, leaves millions of qualified potential homebuyers with really two grim alternatives. One, they are going to pay higher rates upfront for a mortgage that is going to fall outside the regulators’ proposed QRM standard. Or, two, it will delay homeownership for a decade or more, so that people would have to save up for an onerous down payment.
And this is precisely the outcome that Senator Isakson, Senator Landrieu and I sought to avoid when we crafted the QRM.
You know, when I look in North Carolina, it would take nine years for a typical family to save for a 10 percent down payment and probably 14 years for somebody to come up with a 20 percent down payment. And this really is, I think, damaging to people who want to own their homes and [discouraging] for responsible American families who are out there looking. And I also think it lengthens the duration of our nation’s housing woes.
Q: That’s similar to what you and Senators Isakson and Landrieu wrote in your op-ed on May 12 in Politico and inThe Charlotte Observer. You described the proposed 20 percent down payment as an “extreme outcome” that would “further cripple the fragile housing recovery.”
A: Yes. That’s the critical part of this. We are coming out of this recession. We all know that home purchases will help fuel the recovery, because once someone goes into a home, they obviously buy furniture and appliances--and that helps the economy, and I think this onerous 20 percent down payment is just not called for.
Q: You and Senators Isakson and Landrieu also wrote in your op-ed, “We cannot price millions of middle-class American families out of the housing market for an arbitrary and inconsequential default rate decrease. It is time for the regulators to go back to the drafting table.”
One of the regulators--the Department of Housing and Urban Development [HUD]--does propose a 10 percent down-payment alternative. Do you think that would work?
A: Let’s just say that’s going in the right direction.
MB
Robert Stowe England is a freelance writer based in Arlington, Virginia. He can be reached at
Copyright © 2011 Mortgage Bankers Association. Reprinted with Permission.
