“…after an uproar from real-estate agents, lenders and civil rights groups, banking regulators dropped the 20% down payment requirement in a new proposal issued last year…
…Under the revised approach, regulators would include a broad exemption for banks and other issuers of mortgage-backed securities from having to retain 5% of the loan’s risk on their books. The rules aren’t likely to affect many home buyers because most mortgages issued today are backed by Fannie Mae, Freddie Mac or other federal agencies, whose guarantees are expected to satisfy the federal risk-retention standards.” Alan Zibel and Andrew Ackerman, “U.S. Mortgage Regulators Poised to Finalize Relaxed Mortgage Rules”, Wall Street Journal
“It’s only took six years to produce these toothless, “form-over-substance”, new mortgage standards!!! Beyond banning limited income documentation loans (even for borrowers with substantial home equity, outstanding credit, and other liquid assets…which is hurting housing and the economic recovery today)….except for FHA reverse mortgages, what has really changed? Not much. Unless you think the banking regulators are erring here (after all this time and debate about the U.S.’s huge housing bust and mortgage crisis), this “no real change” provides more evidence that it wasn’t mortgage standards that were the primary problem, but an unprecedented housing bubble/bust created by macro-economic factors (trade and current account deficits, well-intended government housing policies, national statistical rating agencies, etc.) and Fed-engineered, pre-crisis low rates. (All discussed thoroughly on this blog.)”, Mike Perry, former Chairman and CEO, IndyMac Bank
U.S. Regulators Poised to Finalize Relaxed Mortgage Rules
Looser Set of Standards a Victory for Real Estate and Mortgage Industry Groups
By Alan Zibel And Andrew Ackerman
WASHINGTON—After more than three years of deliberations, U.S. financial regulators are poised to finalize long-delayed mortgage market standards next week, adopting a relaxed set of rules designed to ensure credit is broadly available.
In a victory for real estate and mortgage industry groups, regulators are expected to finalize a far looser set of standards for mortgages packaged into securities and sold to investors than initially proposed in April 2011. The Federal Reserve on Wednesday said it would consider the issue at an open meeting Oct. 22, and five other regulators, including the Federal Deposit Insurance Corp. and the Securities and Exchange Commission, are also expected to sign off on the rules this month.
The rules, which stem from the 2010 Dodd-Frank law, will no longer require that borrowers make a 20% down payment to get a so-called “qualified residential mortgage.” Instead, loans will have to comply with a separate set of mortgage standards, including limits on how much overall debt a borrower can have in relation to monthly income.
The rules are aimed at preventing a repeat of the 2008 financial crisis, when lax underwriting standards by banks allowed faulty mortgages that were unlikely to be repaid to be packaged into securities and sold to investors. The initial proposal stipulated that issuers of mortgage-backed securities must hold a portion of the loan’s credit risk or require a 20% down payment. The idea behind the proposal was that banks would be less likely to engage in risky lending practices if they had some “skin in the game.”
But after an uproar from real-estate agents, lenders and civil rights groups, banking regulators dropped the 20% down payment requirement in a new proposal issued last year. Under the revised approach, regulators would include a broad exemption for banks and other issuers of mortgage-backed securities from having to retain 5% of the loan’s risk on their books.
The rules aren’t likely to affect many home buyers because most mortgages issued today are backed by Fannie Mae, Freddie Mac or other federal agencies, whose guarantees are expected to satisfy the federal risk-retention standards.
Under the new rules expected to be voted on next week, loans would have to comply with a separate set of mortgage standards written by the U.S. Consumer Financial Protection Bureau. Those rules outline steps lenders must take to demonstrate that a borrower has the ability to repay a mortgage. Borrowers’ monthly debt payments must not exceed 43% of their income, though looser standards apply to loans sold to mortgage-finance companies Fannie Mae and Freddie Mac.
The rules could eventually help draw investors back to the market for mortgage-backed securities that aren’t backed by the U.S. government. Private investors have shied away from the U.S. mortgage market in recent years in the wake of the housing market’s bust. The total value of mortgage-backed securities that aren’t guaranteed by federal entities plunged from nearly $1.2 trillion in 2005 to just over $20 billion in 2012, before recovering to nearly $39 billion last year, according to trade publication Inside Mortgage Finance.
“The additional certainty will have a helpful impact at the margins, bringing some wary investors in from the sidelines and giving some of those already invested enough comfort to invest more aggressively,” said Jim Parrott, a former White House housing policy official who is now a fellow at the Urban Institute.
The mortgage rules were the subject of intense lobbying from outside groups and internal haggling among regulators. Over the summer, the SEC pushed for compromise language to address concerns that the rule may not go far enough to prevent the type of lax underwriting that helped fuel the 2008 financial crisis. Regulators agreed to re-evaluate, and potentially adjust, the rule two years after its effective date and every five years after that.
The rules come in the wake of related efforts by regulators to boost transparency in the securities markets, as mandated by the Dodd-Frank law. In August, the SEC finalized separate rules to give investors more information about the quality of mortgage and other loans pooled into mortgage securities and other bonds.