Financial regulators are proposing new rules for mortgages that they say will help prevent a future financial crisis but that critics say will make it more expensive to buy a home and could hurt the fragile housing market.
In a compromise to banks and housing advocates, however, regulators would create a long phase-in period for the rules by exempting loans guaranteed by Fannie Mae and Freddie Mac from the new standards as long as they are under the government’s control, which could be many more years.
The government took Fannie and Freddie over in 2008 at the height of the crisis and has spent more than $150 billion to bail them out. They currently insure more than half of all new mortgages against default for a small fee that raises monthly payments. Washington policymakers are considering proposals to close them down eventually.
On Monday, regulators announced they had agreed to the new rules for "safe" home loans -- “qualified residential mortgages” [QRM] -- required under financial regulation reform approved by Congress last year.
According to a summary of the proposal obtained by Fox Business, the rules would require future homebuyers to put down at least 20% of the purchase price of a home -- during the financial crisis, some loans required no money down -- and meet strict income requirements to qualify for the loan with the lowest interest rates. It is a “back to basics” approach, in the words of one banking industry lobbyist.
“The proposed definition of QRM would establish conservative underwriting standards designed to ensure that QRM loans are of very high credit quality,” the document said. “The proposed rule generally would prohibit QRMs from having product features that add complexity and risk to mortgage loans, such as…interest-only payments or significant interest rate increases.”
But “back to basics does not mean back to the Dark Ages,” said Glen Corso, managing director of the Community Mortgage Banking Project. “The proposed rule would place affordable mortgages out of reach for 22 million Americans, while having a negligible impact on defaults…Mandating a minimum down payment of 20 % or more will not improve loan performance in a meaningful way. But it will most certainly make loans more expensive, and perhaps out of reach, for responsible home buyers.”
The Federal Deposit Insurance Corporation and Securities Exchange Commission are scheduled to vote on the new rules this week as part of Dodd-Frank regulation reform, which requires lenders to retain at least a 5% in home loans that do not meet the tougher standards and that lenders package up and sell to investment funds, pension funds and other investors as mortgage-backed securities. The idea is to make sure mortgage originators have “skin in game” in loan securitization, giving them stronger incentives to monitor and manage the loans closely over time.
In November, the nation's largest mortgage lender, Wells Fargo (NYSE:WFC), suggested down payments of at least 30%, to provide a bigger cushion with more protection against default or foreclosure. The proposal gained little traction among regulators.
The rules will also be designed to help revive the market for "non-standard" loans with smaller down payments, as not all credit-worthy home buyers can afford even 20% down.
Aside from the FDIC and the SEC, the other regulators agreeing to the proposed rules were the Federal Reserve, the Department of Housing and Urban Development, the Office of the Comptroller of the Currency and the Federal Housing Finance Agency, which regulates Fannie and Freddie.
The agencies will put the proposed standards out for public comment before final adoption.