Mortgage Rule Could Exacerbate Housing Slump

WASHINGTON (By Corbett B. Daly) - U.S. regulators are gearing up for a landmark decision that could be pivotal in the recovery of the housing market -- how much risk can mortgage lenders sell to investors without having to hold on to some of it themselves?

The new standard will determine what loans are deemed safe enough for lenders to sell without holding 5 percent of the value on their own books.

How officials choose to define these new ultra-safe loans -- dubbed qualifying residential mortgages -- will have implications for who can get a mortgage, the price they will pay and how quickly the struggling housing market revives.

"We are playing with dynamite here," said Tim Rood, a partner at The Collingwood Group, a housing consultancy in Washington. "If the borrower is paying more, the borrower can't afford as much house" and home prices would fall, he said.

This 5 percent "risk retention" rule was mandated by last year's rewrite of Wall Street rules to try to improve mortgage underwriting by making lenders bear more of the cost of loans that go bad.

Poor underwriting led to the mountain of bad debt that touched off the financial crisis and led the nation into its deepest recession since the Great Depression.

Federal Deposit Insurance Corp Chairman Sheila Bair wants to require 20 percent down payments to thwart the excesses that fueled the financial crisis. Industry heavyweight Wells Fargo has proposed an even tougher standard: 30 percent.

Loans that do not meet the new "QRM" definition would not be allowed to be fully securitized. Since lenders will be bearing more risk, they will want to pass off their increased costs to the borrower.

NOT PERFECT

"This could easily create a situation where less-than-perfect borrowers have no ability to get mortgages, which could make an already tight mortgage market even tighter," said Jaret Seiberg, an analyst with MF Global in Washington.

That could have serious ramifications for the housing market.

"Mortgages are already hard to get and making them even harder to get will add insult to injury to a stalled housing market," said Diane Swonk, chief economist at Mesirow Financial in Chicago.

"Unfortunately, some of the solutions to avoid another housing bubble would extend the housing bust," she added.

Home prices have been falling since a popular tax-credit for homebuyers expired in the spring and could reach new lows in just a few months, even without a further tightening in credit standards.

The QRM decision, which will be made by a gaggle of regulators from the FDIC to the Department of Housing and Urban Development to the Federal Reserve, is just one of many decisions confronting policymakers that could impact the availability and costs of mortgages.

The Obama administration as soon as next week is expected to unveil proposals for reworking the U.S. housing finance system. In particular, it will need to weigh in on the future of Fannie Mae and Freddie Mac, the two mortgage finance giants who were seized by the government at the height of the financial crisis.

Along with the Federal Housing Administration, Fannie Mae and Freddie Mac, which have taken more than $150 billion in direct taxpayer aid, are the government's biggest props for the shaky mortgage market. Along with the Veterans Administration, this trio backed 86.8 percent of all new residential mortgages last year, according to Inside Mortgage Finance.

A Treasury Department spokesman on Friday said the government had "too big a footprint" in the mortgage market and the Obama administration aimed to make it smaller.

But even as policymakers debate scaling back support for housing, a tough QRM standard could lead more borrowers into loans backed by the FHA.

The FHA, which does not make loans directly but guarantees them for borrowers subject to certain restrictions, is QRM exempt.

(Additional reporting by Dave Clarke; Editing by Andrea Ricci)

Copyright 2010 Thomson Reuters. Click for Restrictions.

Comments

[MilesToGo]

02:29 PM on 02/08/2011

The housing prices have not yet fallen far enough from the 2003-2005 days of absurd sky-high
speculative prices. And banks have proven that they clearly cannot be trusted, so more than just due diligence combined with free markets is needed to protect investors and home buyers. This should be apparent to any rational, reasonably intelligent and ethical person. The stench from Wall Street persists, as is witnessed by the ongoing compensation chicanery.

[Peter007]

10:05 AM on 02/08/2011

The free market is the best tool used to determine LTV, interest rates, risk, and rules about selling a mortgage to a 3rd party.

The Federal Government stinks when it comes to setting rules and regulations. Look at FNMA.
The housing bubble was caused because lenders followed FNMA rules about underwriting.

Any Investor needs to do their due diligence before they purchase a mortgage or a mortgage backed security.
The Federal Government has no expertise in knowing what is a good or bad investment.
And the Federal Government has no business in bailing out those that make poor investment decisions.

[MilesToGo]

02:37 PM on 02/08/2011

The federal government is not a monochromatic entity that can be deemed pejorative by those who imagine themselves to be sophisticated free-marketeers. Many federal regulatory agencies and bodies were intentionally filled with incompetent diletantes or worse, by specific intention of political ideologues villainously intent on subverting government & sensible regulatory methods.

There are plenty of ethical, able & experienced people who can fill federal regulatory agencies and put a check on the wild culture of financial manipulation & greed. The free market mythologies have been proved false, detrimental and even, if considered correctly, criminal.

[Wupta]

04:21 AM on 02/08/2011

Get rid of fico this just another corporate tool go control and enslave the people.

[oilfield]

12:01 AM on 02/08/2011

make it 30% down....folks dont have the 5% down or 10% down in a lot of cases....that way we can just freefall to the bottom.

[Law-school-lady]

05:17 PM on 02/07/2011

Again, we have history from which to draw. What were the rules after the last Great Depression? Seems like mandating good credit to qualify for home buying is after this recent Great Recession is unfair. We should scrap FICO. Forget Fair, Isaac and Company. Credit ratings are just another corporate scam anyway. But 20% down finance 80% together with Glass–Steagall Act worked very well for almost 100 years and will work easily again. If President Obama and advisors do differently, it'll just be for the benefit for big business and we'll go the way of Japan, except for having more dispossessed people in the streets. Visions of the streets of Cairo in San Francisco, LA, and Las Vegas come to mind. The politicians, for the sake of our country need to do a better job of weighing fairness against big corporate profits. We should all call for Michelle Obama to be the ambassador to the dispossessed and visit the families while they're being ousted from their homes. Dispatch Michelle Obama like Eleanor did for her husband FDR and then report back to the President. That action, if truly done, will solve this fraudclosure crisis in a hurry!

[dadw5boys]

08:52 PM on 02/07/2011

They can still work the system with Overvaluing the Property by 30 % then using part of the Loan to cover the Down payment and leave some poor sucker with a $130,000 loan on a $100,000 home and they took $25,000 back !

[OllaBarabolla]

04:55 PM on 02/07/2011

home prices should fall until the average person is not paying more then 25% of take home pay on his mortgage - that used to be the golden rule. the banksters are saying 30-32% but they
are devaluing the value of your paycheck. you still have to save to buy a car, for your childrens education, for your retirement & also set aside money to upkeep & repair your house.
prices must come down. too bad for the suckers who bought overpriced houses thinking they
could flip the house or the value of the house would keep going up. the higher the home prices were, the less value our paychecks had. that's something alot of people did not want to
accept.

[educatetheleft]

03:40 PM on 02/07/2011

America is full of small business owners, and some of those businesses happen to be mortgage brokers, correspondent lenders, and banks. 5% to an institution like BofA or Wells is pocket-change for them. For the smaller businesses, this could mean everything. There are already rules in place that make the loan officer and the company selling the mortgage financially responsible for predatory lending under the new GFE2010 laws put in place last year. If they are not predatory lending, why should they be responsible for a service being provided and that person happens to lose their job. The investor (one who puts worth the funds to lend) should be the one taking the risk, not the service provider. It's an obvious power grab by the big banks/govermenr. If this goes forward, this will literally slam the already fragile economy by disrupting one of its biggest sectors. This is the perfect example of "slippery-slope".

[ritamary]

02:44 PM on 02/07/2011

This article seems to say mortgage lenders should not have to retain any of the risk, not even 5%, on the loans they make. Am I missing something? Isn't that what got us into the mess we are in now?

[INDIVIDUALTERRY]

02:49 PM on 02/07/2011

bingo!

[Law-school-lady]

05:19 PM on 02/07/2011

Word!

[January]

01:58 PM on 02/07/2011

Wait, wait. You mean that there are some consequences to the history of builders and banks distorting the housing market? You mean builders won't be able to put up as big a house as they possibly can so that they can squeeze more profit from mcmansions? But don't the retired couples that can afford those need three car garages?

And you mean that bankers won't be able to accept falsified information about income to justify selling those mcmansions? Yeah, that sure will be a problem, as much a problem as the sun going down everyday. But I am sure the profiteers will find some way around whatever obstacles put in their way.

[SF TKF]

01:49 PM on 02/07/2011

Until jobs recover and housing comes down to 30% of the average income for the locality, there will continue to be problems with the housing market. It’s really not all that complicated.