Federal regulators proposed far-reaching changes to
lending rules that eventually could raise the cost of borrowing for
most homeowners, kicking off what is likely to be a furious effort by
the housing and banking industries to soften the proposal.
The Dodd-Frank financial-overhaul law requires banks to hold 5% of
the credit risk for mortgages and other loans that are bundled together
and sold off as securities. The idea is that banks and other issuers of
securitized loans will do a better job ensuring the quality of those
loans if they are required to have more "skin in the game."
Lawmakers directed six different regulators to write the proposed
rule, and the law also allowed regulators to exempt certain
gold-standard residential mortgages from the risk-retention requirement.
Since the rules are likely to raise costs for lenders, any mortgages
satisfying the "qualified residential mortgage" definition are likely to
have lower borrowing costs.
If approved, the proposal would eventually reset what constitutes a
prime mortgage as only those to borrowers who make down payments of at
least 20%, with higher equity levels required for refinances.
The real-estate industry and
consumer-advocate groups already have forged an unlikely alliance to
push for less-restrictive rules. They say the rules could substantially
raise borrowing costs, particularly for first-time home buyers. "You're
clearly creating a nation of have and have-nots when it comes to
housing," said Jerry Howard, president of the National Association of Home Builders.
Critics of the rule say relatively few borrowers will be able to
obtain the less costly, gold-standard mortgages. Around 46% of all
homeowners with a mortgage had less than 20% equity in their homes at
the end of 2010, according to CoreLogic Inc., a real-estate data firm.
"A rigid 20% down payment requirement is going to unnecessarily
prevent the middle-class, first-time home buyers from getting affordable
mortgages," Sen. Kay Hagan (D., N.C.) said in an interview.
Any changes won't be felt immediately because government agencies are
exempt. The proposal also said Fannie Mae and Freddie Mac currently
satisfy the risk-retention rules because the firms, which guarantee 100%
of losses to investors on mortgages they securitize, are backed by the
U.S. government. The mortgage giants, together with federal agencies,
currently back nine in 10 new loans.
Advocates of a narrow definition of a qualified mortgage, including Wells Fargo
& Co., have argued it would create a more robust and liquid market
for loans that fall outside the definition and are subject to the
risk-retention rule. Regulators echoed that view Tuesday. Federal
Deposit Insurance Corp. Chairman Sheila Bair
said the rule doesn't mean "all home buyers would have to meet these
high standards to qualify for a mortgage." The exemption, she said, will
apply to "a small slice of the market."
While regulators opted for a narrow set of standards to define the
"qualified" mortgage, they allowed greater flexibility for sponsors of
securitizations to decide how to retain risk. Critics have said the
risk-retention rules could fail to ensure better underwriting or have
more serious, unintended consequences for housing markets by raising
costs for even qualified borrowers.
Mortgages that aren't subject to costly 'risk-retention' rules must meet certain requirements:
- 20% down payment for new mortgages; a 75% loan-to-value ratio for refinances, and a 70% ratio for 'cash-out' refinances
- Borrower hasn't missed two consecutive payments on any consumer debt within two years
- Mortgage-related debt is no more than 28% of income, and total debt doesn't exceed 36% of income
- Fully amortizing loans
"With the way it's drafted, very few loans
are going to qualify" as qualified residential mortgages, says Lewis
Ranieri, the pioneer of the home-mortgage-bond market.
One concern is that if the risk-retention rule isn't properly
designed, the sponsors of securitizations, primarily the nation's
largest banks, "are going to figure out ways around it, and it's not
going to be all that meaningful," said Mark Zandi, chief economist at
After the draft version is approved by each agency, it will be open
to public comment until mid-June. The FDIC's five-member board voted
unanimously Tuesday to approve the draft rule, as did the Federal
Reserve on Monday.
Once the comment period ends, the regulators would be able to make changes to it before adopting a final version.
Separately, U.S. banking regulators proposed Tuesday to require that
the nation's largest financial firms provide a road map to help quickly
and cleanly dismantle them in the event of a financial crisis.
The FDIC approved a draft rule requiring the firms to submit to
regulators resolution plans, also known as living wills, with regular
updates and reports on the firms' credit exposures. The Federal Reserve,
which co-wrote the rule, is expected to vote on it later this week. The
proposal will then be open to public comment for 60 days, after which
regulators will revise it and approve a final rule.
"The ability to plan in advance for the orderly resolution of a
systemic entity is key to ending 'too big to fail,' " Ms. Bair said.
—Alan Zibel contributed to this article.