“Today’s rule-making takes the untenable (government) housing policy that injected irrational exuberance into mortgage lending and, as a result, caused a catastrophic financial crisis and chisels that failed policy into the stone tablets of the code of federal regulations.”, SEC Commissioner Daniel Gallagher
U.S. Agencies Approve Relaxed Mortgage-Lending Rules
New Standards Represent Effort to Ensure More Mortgage Loans Are Available, Officials Say
SEC Commissioner Daniel Gallagher, center, said the rules could sow a repeat of the financial crisis. Bloomberg News
By Andrew Ackerman and Alan Zibel
WASHINGTON—Three U.S. agencies signed off on relaxed mortgage-lending rules Wednesday, helping complete a long-stalled provision of the 2010 Dodd-Frank financial law.
The Federal Reserve, Securities and Exchange Commission and Department of Housing and Urban Development approved the new rules for the mortgage-backed securities market, a day after three other agencies approved the standards.
The regulators’ actions came over the objections of two SEC commissioners, who warned the rules would do little to prevent a return to the kind of lax mortgage underwriting that fueled the financial crisis.
The rules are intended to improve the quality of loans by giving banks a financial incentive to ensure mortgages can be repaid. The initial rules required that banks hold 5% of the risk of mortgages packaged and sold to investors or require a 20% borrower down payment. But regulators,
Instead, banks will be able to avoid the 5% risk-retention requirement if they verify a borrower’s ability to pay back the loan and comply with other requirements, such as a requirement that a borrower’s debt payments not exceed 43% of their income.
The rules represent an effort to ensure that more mortgage loans are available to consumers, officials said.
The regulation is “another important step in implementing the Dodd-Frank Act and in enhancing stability in the securitization market,” said Fed Chairwoman Janet Yellen .
Two Republican SEC commissioners, Daniel Gallagher and Michael Piwowar, objected to the rules, with Mr. Gallagher saying they could sow a repeat of the financial crisis and Mr. Piwowar citing inadequate economic analysis. The SEC voted 3-2 to approve the rules.
“Today’s rule-making takes the untenable housing policy that injected irrational exuberance into mortgage lending and, as a result, caused a catastrophic financial crisis and chisels that failed policy into the stone tablets of the code of federal regulations,” said Mr. Gallagher.
Officials have said 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.
They also said the standards were sufficiently strong to prevent a repeat of some of the worst abuses from the crisis, including loans in which the lender does nothing to verify a borrower’s income.
The rule, which goes into effect in fall 2015, will be reviewed for its impact on the economy four years later, and every five years after that.
“It is important that we closely monitor the implementation of this exemption to assess its impact,” said SEC Chairman Mary Jo White .
The rules only impact the tiny market for “private label” securities issued without federal backing.