Senators criticize proposed U.S. mortgage rule

WASHINGTON Fri May 27, 2011 2:27pm EDT

WASHINGTON (Reuters) - A bipartisan group of senators is pushing back against a financial reform designed to make the housing market less risky, arguing regulators went too far in defining a safe mortgage.

Close to 40 senators have signed a letter they plan to send to regulators on Friday in which they contend the rule will make it harder for credit-worthy borrowers to get homes.

The Dodd-Frank law takes aim at widespread criticism that lending standards became too lax in the run up to the 2007-2009 financial crisis because loans were bundled together and sold as securities. Critics argue that the originator of the loan or the firm creating the security had little stake in whether the loan performed because it was being sold to investors.

In response, the law requires the securitizer to hold onto 5 percent of the loans being securitized so they have a stake in the loan's performance, or "skin in the game."

Mortgages that meet strict underwriting standards, however, are exempted from this risk retention requirement. These exempted loans are known as Qualified Residential Mortgages (QRM).

In March, regulators released a proposed rule that would require these exempt home loans to have, among other standards, a 20 percent down payment.

In their letter, the senators argue the underwriting standards regulators have developed go beyond what Congress intended and will make it harder for many borrowers to get a home loan.

"These restrictions unduly narrow the QRM definition and would necessarily increase consumer costs and reduce access to affordable credit," the senators wrote. "Well underwritten loans, regardless of down payment, were not the cause of the mortgage crisis."

The letter was spearheaded by Democratic senators Mary Landrieu, Kay Hagan and Jeanne Shaheen and Republican Johnny Isakson. It was sent to the heads of financial regulators, such as the Federal Reserve, as well the Housing and Urban Development Department and the Federal Housing Finance Agency.

The lending industry and consumer advocates have also criticized the rule as being too strict in a rare moment of agreement over how the Dodd-Frank law should be implemented.

Regulators have said these concerns are overblown because the standard will only impact a small percentage of the market.

"The QRM is not supposed to be a universal standard, but an exception to a general risk retention rule," acting Comptroller of the Currency John Walsh said in a May 19 speech.

(Reporting by Dave Clarke; editing by Andre Grenon)

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