Risk retention crucial to housing reform: Treasury

WASHINGTON (Reuters) - Regulators want to ensure mortgage lenders retain some of the risk on loans they originate, as it is crucial to strengthen the housing finance system, a top Treasury official said on Friday.

"We are committed to implementing risk retention reforms in a thoughtful manner that ensures continued access to sustainable mortgage credit for low- and moderate-income borrowers and protects the health of the still-fragile housing market," Treasury Under Secretary Jeffrey Goldstein said in remarks prepared for delivery at mortgage conference.

"Better underwriting practices for mortgages are good for consumers, good for the financial industry, and good for the economy," Goldstein said.

The Treasury is involved in implementing requirements from the Dodd-Frank Wall Street reform bill to curb risk-taking at financial firms. The legislation called on federal regulators to establish new guidelines for lenders and originators of securitized loans, the types of instruments that fueled the 2007-2009 financial crisis.

The proposed rules are intended to reduce risk-taking by forcing lenders to hold onto a 5 percent stake in any loan bundled for investors in the secondary market. Regulators proposed an exemption for the so-called qualified residential mortgages when borrowers make 20 percent down payments.

Critics say the rules would keep potential first-time buyers out of the housing market and drive up borrowing costs because lenders would charge higher rates for loans that do not qualify for the exemption. A comment period on the proposed rule expires on August 1.

The new rules are being proposed jointly by six federal regulators: the Federal Reserve, the Department of Housing and Urban Development, the FDIC, the Federal Housing Finance Authority, the Securities and Exchange Commission, and the Office of the Comptroller of the Currency.

An unlikely alliance of mortgage and consumer groups -- including the American Bankers Association, the Center for Responsible Lending and the National Community Reinvestment Coalition -- have petitioned for regulators to make changes, and say the proposal could make it more difficult for borrowers to find affordable home loans.

Goldstein said regulators were trying to balance access to credit with strengthening the resiliency of the housing finance system. Risk-retention rules are an "important part" of that effort, he said.

"Fundamental flaws in the securitization market and the originate-to-distribute model were a key contributor to the housing bubble that helped precipitate the worst recession since the Great Depression," Goldstein said.

He said the final rule will address the major problem seen in the financial crisis: a "lack of alignment of interests between originators and securitizers relative to investors." (Reporting by Margaret Chadbourn; Editing by Ramya Venugopal)