WASHINGTON Aug 28 U.S. federal regulators on
Wednesday will unveil a reworked proposal aimed at reducing risk
in the mortgage market and limiting the type of shoddy
underwriting practices that fueled the housing bubble.
The Federal Deposit Insurance Corp (FDIC) will vote on
whether to release for public comment rules requiring lenders
and bond issuers to keep a stake in loans that they bundle and
sell as securities, with the exception of mortgages that are
Five other agencies, including the Federal Reserve and the
Department of Housing and Urban Development, were required by
the 2010 Dodd-Frank law to work on the rules and are expected to
put forth similar proposals shortly.
The plan, which is being re-proposed after an initial
version drew wide criticism, is expected to loosen the
definition of "qualified residential mortgages" that are
exempted from the regulations.
Regulators originally said banks and bond issuers would have
to keep "skin in the game," or hold part of securitized loans on
their books, unless the mortgage included a 20 percent down
That proposal in 2011 caused alarm across the housing
industry and among consumer groups. They feared the rules, as
originally set out, could restrict access to credit for some
In the new proposal for public comment, the agencies are
expected to eliminate the downpayment requirement for qualified
Instead, mortgages that meet a minimum standard already
approved by another regulatory agency will be considered exempt
from the risk retention rules.
"It's very important that they're making this resubmission,"
said Barry Zigas, director of housing policy for the Consumer
Federation of America. "I think it's a reflection of the fact
that there was a very, very broad range of unified comment on
the difficulties the proposed rule might create."
A FUTURE MORTGAGE FINANCE FRAMEWORK
The new proposal comes amid a slew of changes inspired by
the 2007-2009 financial crisis. Regulators have cracked down on
mortgage underwriting, the way banks deal with borrowers with
outstanding loans, and other aspects of lending.
Lawmakers also intend to overhaul U.S. housing finance in
response to the market collapse that forced the 2008 takeover of
Fannie Mae and Freddie Mac, a process that could take years.
The risk retention rules are aimed at preventing banks from
writing risky loans with impunity. In the years leading up to
the crisis, banks used shoddy underwriting standards under the
assumption that they could sell loans off to securitizers and
avoid harm if the borrowers defaulted.
Dodd-Frank called for lenders and bond issuers to hold 5
percent of those loans on their books, giving them more
incentive to make better loans.
The law called for some mortgages to be exempt but did not
require a downpayment. When regulators decided "qualified
residential mortgages" would need a 20 percent downpayment,
critics said that could hamper credit and hurt the economy.
"The reaction was fairly extraordinary and unanimous from
consumer advocates, industry experts and housing stakeholders -
all aligned around the fact that the rule as proposed could have
had an adverse impact on the housing recovery," said David
Stevens, chief executive of the Mortgage Bankers Association.
Regulators instead plan to scrap the downpayment and match
the "qualified residential mortgage" exemption to the Consumer
Financial Protection Bureau's standards for good mortgage
The consumer bureau's standard, which is part of rules
requiring banks to make sure borrowers can repay loans, includes
mortgages that have low fees and that go to consumers who do not
have big debt loads already.
The six agencies also plan to ask for public comment on a
number of additional questions, including whether or not a
downpayment requirement should be added for exempt loans.
Regulators hope to complete the risk retention rules by the
end of the year, before a series of unrelated mortgage rules
takes effect in early 2014.