U.S. regulators strike deal on mortgage risk rule

WASHINGTON Tue Mar 1, 2011 4:23pm EST

WASHINGTON (Reuters) - Banking regulators have tentatively agreed on a new risk retention rule that will define when banks have to retain an interest in mortgages they write, according to a source with knowledge of the negotiations.

The agreement also includes some new standards for the mortgage servicing industry on when loan modifications have to be offered to borrowers.

One provision would force servicers, which collect payments and work with borrowers, to offer to modify a troubled loan if doing so would cost the lender less over time than foreclosing on a borrower, the source said.

The risk retention rule, which is required by the Dodd-Frank law, will force loan originators and securitizers to retain in their portfolios at least 5 percent of the value of loans, rather than shifting all of the risk to investors who buy the loans.

The provision was added to the law so that originators have "skin in the game," or a stake in the success of the loans they issue.

Certain mortgages could escape this requirement if the loan includes a 20 percent down payment on the property, according to the source.

The new risk retention rule is designed to avert past problems in the securitized loan market caused by risky mortgages provided to borrowers who could not meet their payments.

Regulators are expected to unveil the rule in a couple of weeks. Beyond the banking agencies, the Securities and Exchange Commission, the Housing and Urban Development Department and the Federal Housing Finance Agency will have to sign off on the proposal.

Federal Deposit Insurance Corp Chairman Sheila Bair has advocated a 20 percent down payment as one of the standards a mortgage should meet to be exempt from risk retention requirements.

"I think the ... rules will reflect more traditional mortgages since they were done in the U.S. before the craziness started," Bair told the Reuters Future Face of Finance Summit on Monday.

Regulators had hoped to have a draft rule out as early as late 2010, but they sparred over whether it should include new mortgage servicing standards.

Regulators, lawmakers and consumer groups have been calling for new standards after banks were accused late last year of taking possibly illegal shortcuts in some foreclosure proceedings, such as using "robo-signers" to sign hundreds of unread documents a day.

Bair has advocated that new standards be included in the risk retention rule while the Office of the Comptroller of the Currency and the Federal Reserve have argued they be moved separately.

In a compromise some new standards are being included in the risk rule while a broader crackdown on servicing practices is being separately negotiated.

(Reporting by Dave Clarke; Editing by Steve Orlofsky)

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