With the publication in early April of a Notice of Proposed Rulemaking (NPR) on the risk-retention requirement of the Dodd-Frank Act (DFA), we are beginning to see the outlines of the housing finance system the act envisions. If this proposed rule is adopted substantially as written, and there are no changes in the other provisions the act has added to the laws governing mortgage lending, the housing finance system of the future will place immense financial risks and regulatory costs on mortgage originators and securitizers, fail to prevent the growth of subprime and other low-quality lending, virtually ensure the continued existence of the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, impair the development of a robust -private-sector housing finance system in the United States, and provide insurmountable advantages for the largest banks in the limited private securitization system that might exist. These adverse consequences cannot be corrected through regulatory action, so the housing finance system envisioned by the DFA should be replaced by an AEI plan that would define prime mortgages by statute.
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