U.S. Regulators Approve Eased Mortgage Lending Rules - NYTimes.com

U.S. Regulators Approve Eased Mortgage Lending Rules - NYTimes.com: "The regulators left out the down payment requirement after a firestorm of criticism from bankers and consumer advocates. They asserted that such a measure could restrain the flow of housing credit, particularly to borrowers who would have to save for many years to afford a down payment.

But some financial experts are disappointed with the new rules. They contend that, over time, the exclusion of a down payment requirement could once again allow banks to stoke dangerous risks in the financial system — and then evade the pain when the losses pile up.

“This is unfortunate,” said Sheila C. Bair, former chairwoman of the Federal Deposit Insurance Corporation, another of the regulators that approved the so-called risk retention rules on Tuesday. “If the loan goes bad, you have much bigger losses with zero percent down than 20 percent down.”

The Office of the Comptroller of the Currency also adopted the rules on Tuesday, and the Federal Reserve and the Securities and Exchange Commission are expected to sign off on them on Wednesday.

The overhaul has its roots in the years leading up to the financial crisis of 2008. Banks and Wall Street firms packaged billions of dollars of shoddy mortgages and sold them to bond investors, who later suffered huge losses when the loans went bad. To guard against that happening again, the Dodd-Frank Act of 2010 required banks to hold on to a slice of the loans they sold. As a starting point, the new rules require banks to hold onto 5 percent of the loans they sell. But there are exemptions in the so-called risk retention rule that may enable the banks to hold less or nothing.

The biggest loophole applies to residential mortgages.

Specifically, Dodd-Frank said banks did not have to hold on to home loans if they had a low risk of default. The theory was that such mortgages would probably not end up causing high losses for investors, so the retention regulation did not need to apply to them.

In the first draft of the rule, issued in 2011, regulators identified a solid down payment as something that significantly reduced the likelihood of default on a mortgage. Citing data to support their case, the regulators proposed that the exempt mortgages needed to have a down payment of at least 20 percent of the purchase price of the house.

In the following months, however, housing advocacy groups, mortgage bankers and even some bond investors called upon the regulators to get rid of the 20 percent down payment feature. Instead, they wanted the overhaul to simply apply another new set of home loan requirements — called “qualified mortgage” rules — that do not demand any down payments."



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