Regulators Set To Vote On Stricter Mortgage Rules

Banks will be forced to keep some risk when they securitize all but the most conservatively written mortgages under rules that regulators are expected to vote on Tuesday, the New York Times reported on Monday.

But the banks are likely to be given broad leeway determining what risks they keep, the Times said.

Major banks are hoping to restart the mortgage securitization market that imploded when holders of the securities were burned by toxic mortgages. The banks had pressed regulators to define almost any mortgage, except for the most extreme types no longer being written anyway, as a "qualified residential mortgage," the Times said.

But regulators rejected the banks' idea, according to a summary of the proposal provided to The New York Times by a person briefed on the decision. Instead, regulators have decided that only the most conservative mortgages would qualify. Securitizations of any other mortgages would require the banks to retain at least 5 percent of the risk, the Times said.

Still, regulators agreed to a broad definition of how that risk can be retained, as well as of who will have to retain it, the New York Times said. In some cases they can retain risk by holding onto mortgages that are deemed identical to those being securitized. In others, they would be able to either take the first 5 percent of losses or to hold 5 percent of every class of security, the Times said.

The proposal was developed by the Office of the Comptroller of the Currency, the Federal Reserve, the Federal Deposit Insurance Corporation, the Securities and Exchange Commission, the Federal Housing Finance Agency and the Department of Housing and Urban Development, and is expected to be formally proposed by each of them, with the FDIC set to vote Tuesday, the New York Times said.

(Editing by Lincoln Feast)

Copyright 2011 Thomson Reuters. Click for Restrictions.

Comments

[mtview]

08:16 PM on 03/30/2011

Lending is now too strict. Yes, it was stupid to lend to people with bad credit and no money down but now they will not lend to people with good credit willing to put more than 30% down. The pendulum has swung too far the other way and it is hurting the housing market.

They never should have lent to people without "skin in the game" - and the banks should have that skin in there also.

[Reticent2]

08:26 AM on 03/30/2011

At the mortgage writing level, a homeowner will absorb any financial penalty a bank perceives it "has" to endure as a result of rules about risk. It will be written into fuzzy new fees, and hidden in an assortment of ways. Banks are not really sweating any 5% risk, which can ultimately be used to garner more upfront cash.

[builderman55]

11:49 PM on 03/29/2011

There should be an option when you sign a mortgage with a bank that you choose NOT to have your loan sold. I wonder if that would fly?

[Jayk4444]

11:55 PM on 03/30/2011

Or the bank could check a box and not loan the funds...

[econ1]

01:52 PM on 03/29/2011

Banks should have to hold part (all?) of the loans they make. Owning part of something is the best way to be sure people treat it with care. Perhaps a strict 20% down rule would help limiting loans as well.

[Jayk4444]

11:57 PM on 03/30/2011

The zero down and lack of credit score criterion is how we got here.
A 20% down payment was 'unfair' and kept the working class from getting a home, etc. etc.
If a bank has to hold part of the loan, shouldn't the borrower too (in the form of a downpayment)?

[tacevad]

12:01 PM on 03/29/2011

My parents paid their mortgage for 25 years to the same bank starting back in 1950, My mortgage circa 1986 was sold three times,refinanced once(reduced interest,Clinton Years) and then sold again before it was paid off. Madness!

[tacevad]

11:56 AM on 03/29/2011

closing the barn door is the term that comes to mind

[me again]

10:25 AM on 03/29/2011

This should be a very simple, banks should only loan where they can afford to hold the paper. They should not be allowed to sell martgages.

[totaldisbelief]

10:45 AM on 03/29/2011

the old system worked well for decades..what's wrong with going back to that method ?

[ehorth]

02:58 PM on 03/29/2011

Having worked in mortgage lending, my understanding was that securitization gave the lending institution more funds to make more loans, where in the "old days", the institution lent what they received in bank deposits from customers. Would that work now? I don't know. But I think what would work better is if the actual loan process followed their own lending rules: verifying income; verifying that the house loan is for a primary residence or an investment purchase; that the loan product is a reasonable product for people to use, i.e. the rate is low, the fees are low, the payback rules are reasonable (no pre-payment penalties), etc.

[INDIVIDUALTERRY]

09:55 AM on 03/29/2011

For the last ten years the Barack Obama's , acorns and Barney Franks have been telling these institutions they needed to take on more risk in the form of sub prime loans.
Bet they don't give into blackmail again.

[Ed Baker]

10:08 AM on 03/29/2011

Wrong - most banks didn't do sub-prime and their OCC auditors wouldn't really let them. Subprime loans were funded on the secondary market.

[INDIVIDUALTERRY]

10:16 AM on 03/29/2011

Wrong- did i say banks ? And second , have you seen the offers over the years from Capitol One and Bank Of America ?
Don't believe the big boys were not in there up to their eyeballs.

[ehorth]

03:00 PM on 03/29/2011

The secondary market bought loans from any institution who was packaging them, whether the big banks or smaller lending institutions, including sub-prime loans which were in the form of home equity, or home equity lines of credit.

[RedDog79]

11:08 AM on 03/29/2011

I'm with Ed, you don't know what you're talking about.
I've followed Barney Frank for the last 20 years via American Banker, Federal Register, and thomas.gov; he evan came out and said that not everybody should own a home - that some people should only rent. Frank has been working to abolish Fannie and Freddie (the main secondary market purchasers) for years.

[derspado]

03:22 PM on 03/29/2011

How many visual examples would you like of Bawny propping up fannie and freddie and defending sub prime loans?

[Maranda MassieGuthrie]

09:43 AM on 03/29/2011

they will just take all their new rules and regulations out on us, just to spite the government!!

[Ed Baker]

10:09 AM on 03/29/2011

Of course this will make it harder to lend - and so more borrowers will be excluded, is that good or bad - I guess we'll see.

[amluvinit2]

03:56 PM on 03/29/2011

That's going to be a longer process for people under water too. It is also very hard as it is to sell my house without a signifigant loss, as I moved because of work. Oh well, I guess it's a wait and see.

[Peter007]

09:15 AM on 03/29/2011

Another dumb rule that will generate paper work and more bureaucracy so fines can be levied when papers are not kept in proper order.

Banks are experts in determining risk. The bureaucrats are not. We have non-experts telling experts on how to run their business.
When Fannie Mae was running the Risk business, they improperly determined that risky loans were not risky. They screwed up. They cost the country billions and billions.

Banks and investors should be allowed to make risky investments as long as the risk is properly identified.

[frank day]

09:47 AM on 03/29/2011

Nope. Sorry. TBTF makes that impossible.

Private Profits and Risk = Public Losses

Regulate the heck out of them.

NEVER AGAIN!!

[Ed Baker]

10:10 AM on 03/29/2011

Actually, Fannie and Freddie did very little subprime - and they don't do any now. The subprime loans were from private capital - see Countrywide, Ameriquest, Lehman Brothers for details.

[amluvinit2]

03:57 PM on 03/29/2011

Thank you Ed Baker, you have all those facty thingys that people on the right don't like, and don't care to read.

[Under Fed yet Fed Up]

09:10 AM on 03/29/2011

Is it too much to ask that the entity approving the loan take some responsibility for the liklihood of the loan being repaid?

[frank day]

09:47 AM on 03/29/2011

They must have skin in the game.

[Ed Baker]

10:11 AM on 03/29/2011

They already do - if they lend outside of guidelines, they can be compelled to buy the loan back - and then they don't have 5% in the game - they have 100% in. The bundlers make the rules, lenders just follow them.