Eased Mortgage-Risk Rule to Be Proposed by U.S. Agencies

Regulators today proposed easing a measure to require lenders to keep a stake in mortgages that they securitize, an effort designed to discourage the kind of risky loans that contributed to the subprime credit crisis.

The 505-page draft regulation written by six agencies drops a requirement that lenders retain a stake in mortgages with down payments of less than 20 percent, which appeared in an earlier version of the measure known as the qualified residential mortgage rule. The first draft, released in 2011, drew protests from housing industry participants and consumer groups who said it would impede home lending.

The new measure “will bring a measure of clarity and consistency to the mortgage market that will facilitate its recovery,” Federal Deposit Insurance Corp. Chairman Martin Gruenberg said today at a meeting where the agency’s board members voted to release and seek comment on the proposal.

The draft would align the qualified residential mortgage rule, designed to protect investors, with similarly named guidance governing risky home lending: the qualified mortgage, or QM rule, desiged to protect borrowers. That regulation, issued by the Consumer Financial Protection Bureau in January, contains no down payment requirement. It offers legal protections to banks that make loans defined by the rule as non-abusive.

Shaping Market

Both rules, mandated by the 2010 Dodd-Frank Act, will reshape who can lend and who can borrow because banks will probably make only those loans that conform to the new standards.

The new plan marks a victory for a coalition of Realtors, bankers and consumer advocates who lobbied for the two rules to be aligned.

“We’re very thrilled because we think it’s a victory for home buyers and future homeownership in the country,” Gary Thomas, president of the National Organization of Realtors, said in a telephone interview.

Loans guaranteed by Fannie Mae and Freddie Mac, the mortgage financiers operating under U.S. conservatorship, would automatically be exempt from risk-retention requirements for as long as the companies remain in federal control. The two companies, which would be eliminated under proposals in Congress, currently guarantee about two-thirds of all new home loans.

Daniel M. Gallagher, a Republican member of the Securities and Exchange Commission, one of the regulators issuing the proposal, said in a written dissent today that the new standards were so lax that they would allow lenders to escape retaining risk on many loans that will probably default.

Government Role

“The re-proposed risk retention rules, if adopted, will ensure that the vast majority of mortgages in the United States are insured or owned by the government, will introduce another flawed government imprimatur of creditworthiness into the markets, and will disincentivize proper risk management and due diligence in the mortgage markets,” Gallagher wrote.

The proposal would require banks to retain a slice of mortgages when borrowers are spending more than 43 percent of their monthly income to repay their debt. The earlier version would have required banks to keep a stake in loans when borrowers were spending more than 36 percent of their income on all loan payments. The new measure also would prohibit loans with risky features such as balloon payments or repayment terms of longer than 30 years.

The agencies also asked for public feedback on an alternative that would require lenders to keep a stake in any loan with a down payment of less than 30 percent. That was “not selected as the preferred approach,” the agencies said in the proposal.

The regulators are asking for public feedback on the full proposal by Oct. 30 before they vote to finalize the rule. Additional agencies involved in the rulemaking are the Federal Reserve, Department of Housing and Urban Development, Federal Housing Finance Agency, and the Office of the Comptroller of the Currency.

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