“It’s certainly possible that this is only the beginning of government pressure to make (home) loans with lower lending standards,” Alex Pollock, fellow at the American Enterprise Institute
U.S. Regulators Agree to Go Easier on Mortgage-Lending Rules
Requirement Dropped for 20% Down Payment to Get High-Quality Mortgage
Federal regulators took a big step toward easing postcrisis lending rules Tuesday, agreeing to drop a proposed 20% down-payment requirement that some argued would hamper many consumers’ ability to get a mortgage. Michael Dwyer/Associated Press
By Alan Zibel And Joe Light
WASHINGTON—A push to tighten mortgage-lending standards in the wake of the housing bust has given way to making credit more accessible as Washington frets about the strength of the housing recovery.
On Tuesday, federal regulators took a big step toward easing postcrisis lending rules, agreeing to drop a proposed requirement that borrowers make a 20% down payment in order to get a high-quality mortgage. Regulators, heeding warnings of real-estate groups and consumer advocates who said such a move could crimp the ability of millions of Americans to get a mortgage, voted to require only that a bank document a borrower’s ability to repay a loan and ensure their debt is below a certain threshold.
Mel Watt, director of the Federal Housing Finance Agency, which regulates the entities, said earlier this week that Fannie and Freddie are planning to guarantee some loans with down payments of as little as 3%. The companies also have reached an agreement with mortgage lenders defining what kinds of mistakes on loans could result in penalties years after they are issued—a highly anticipated resolution that could lower barriers and restrictions on borrowers with weak credit.
In New York on Tuesday, J.P. Morgan Chase & Co. Chief Executive James Dimon said most forms of credit have loosened since the financial crisis except mortgages. “Mortgage credit is too tight,” he said. Mr. Dimon attributed that to demands by Fannie and Freddie for banks to repurchase loans that defaulted. “They should have changed that a long time ago,” he said at a conference held by the Urban Land Institute.
The regulatory changes are happening against a backdrop of slowing growth in the housing market. U.S. home sales rose 2.4% last month to the highest level this year but were still down nearly 2% from a year earlier, the National Association of Realtors said Tuesday. Lending has been weak this year because of a drop in refinanced loans, with the total value of mortgage-backed securities issued in 2014 down about 50% from a year earlier, according to trade publication Inside Mortgage Finance. The Mortgage Bankers Association expects total lending for home purchases will fall 13.5% this year to $635 billion, down from $734 billion in 2013.
The sluggishness is prompting concern in Washington as officials fret that postcrisis attempts to limit credit may have gone too far. Exacerbating those worries is the so-called private-label market for mortgage-backed securities—those without government backing—has remained tiny, despite U.S. efforts to jump-start such lending. Only $27.8 billion of such mortgage-backed securities were issued last year, less than 2% of the $1.58 trillion in mortgage securities issued that year, according to Inside Mortgage Finance.
“I think we all underappreciated how long it would take” to restore the market for private mortgage securities, said Jim Parrott, a senior fellow at the Urban Institute and a former housing-policy adviser in the Obama administration.
Fannie Mae CEO Timothy J. Mayopoulos, in a discussion at the Mortgage Bankers Association conference in Las Vegas this week, said the market for private-label mortgage securities “might not come back for quite some time.”
On Tuesday, regulators moved to ease a rule that critics said could further damp the private mortgage-backed securities market. Under a requirement of the 2010 Dodd-Frank law, regulators originally proposed that banks either have “skin in the game” and hold 5% of the risk from the mortgages they package into securities and sell to investors—or require that borrowers make a 20% down payment to get a loan.
Regulators on Tuesday backed away from the 20% down payment, with officials saying they were sensitive to mortgage-industry concerns about the health of the U.S. housing market and didn’t want to add an extra layer of complexity that could constrain lending. Lenders can avoid holding 5% of the risk as long as they verify a borrower’s ability to repay the loan and ensure their debt-to-income doesn’t exceed 43%. Loans sold to Fannie and Freddie are effectively exempt from the risk-retention requirement.
Critics say Washington’s moves are enshrining, perhaps permanently, the dominant role of the federal government in the mortgage market. Some predict the push to loosen lending standards could end just as badly as it did before the 2008 housing bust.
“It’s certainly possible that this is only the beginning of government pressure to make loans with lower lending standards,” said Alex Pollock, a fellow at the American Enterprise Institute, which has long pushed for a reduced federal role in the housing system.
Housing and Urban Development Secretary Julián Castro, in a speech at a mortgage-lending conference Monday, sought to downplay those concerns. “Government must take action by shaping an environment where good lenders and good borrowers can work together without reservation,” he said.
More policy changes designed to expand lending could be coming: Mr. Castro is facing stepped-up pressure from mortgage lenders to lower the premiums the government-run Federal Housing Administration charges to lenders.
The FHA doesn’t make loans but insures low-down-payment loans to low- and middle-income borrowers. It needed a $1.7 billion federal rescue last year, but an annual study of the agency’s finances being released next month is expected to show significant improvement in the agency’s finances.
David Whitley Jr. , vice president of Whitley Mortgage Associates Inc. in Monroe, N.C., said that his company has struggled to make FHA-insured loans to first-time home buyers, in part because of the high costs of the insurance. “The insurance they’re charging right now is over the top,” he said.