- Associated Press - Tuesday, October 21, 2014

WASHINGTON (AP) — Banks will get a break in easier rules for packaging and selling mortgage securities and fewer borrowers will have to make hefty down payments under actions taken by federal regulators.

The regulators have dropped a key requirement: a 20 percent down payment from the borrower if a bank didn’t hold at least 5 percent of the mortgage securities tied to those loans on its books.

The long-delayed final rules unveiled Tuesday by six federal agencies include the less stringent condition that borrowers not carry excessive debt relative to their income.

The board of the Federal Deposit Insurance Corp. voted 4-1 Tuesday to adopt the rules. The Federal Reserve has scheduled a vote for Wednesday, and four other agencies are doing the same.

The rules for mortgage securities will take effect in a year. For other kinds of securities, which don’t allow banks an exemption from the 5-percent rule, the effective date is in two years.

The rules, proposed in 2011, were mandated by the overhaul law enacted in the wake of the 2008 financial crisis. The idea is to limit the kind of risky lending that brought on the crisis. If banks have more of their own money invested in mortgage securities — so-called “skin in the game” — they won’t be as likely to take excessive risks, the thinking goes.

After three years of interagency haggling, the regulators’ final, compromise approach was to adopt the Consumer Financial Protection Bureau’s definition of a “qualified” mortgage. It excludes the kind of risky practices that fueled the crisis, such as mortgages issued without any supporting documents from borrowers.

CFPB Director Richard Cordray, a member of the FDIC board, noted at Tuesday’s meeting that conditions in the mortgage market have changed since the financial crisis and the time of the enactment of the 2010 overhaul law, when anxiety over reckless lending gripped lawmakers. “Credit has dried up for a long period and (lending) standards have tightened dramatically,” he said.

FDIC Chairman Martin Gruenberg said the approach strikes a balance between protecting investors and credit markets “while minimizing costs and burden for consumers and market participants.”

The real estate industry and mortgage bankers lobbied against the original down payment requirement for exemption from the 5-percent rule, saying it could limit the access to mortgages of low- and moderate-income borrowers. Wall Street, looking to revive the market for mortgagesecurities not backed by government-controlled guarantors Fannie Mae and Freddie Mac, also has been awaiting the final rules.

Financial industry interests were quick to claim victory Tuesday. The approach ultimately taken by the regulators was “strongly advocated” by the American Bankers Association, the group’s president Frank Keating said in a statement after the FDIC vote. “This will encourage lenders to continue offering carefully underwritten (mortgage) loans, and avoid placing further hurdles before qualified borrowers, allowing them to achieve the American dream of homeownership.”

Ahead of the crisis, banks packaged and sold to investors bundles of risky mortgages with teaser rates that ballooned after only a few years. The banks had very little of their own money invested. Many borrowers ended up defaulting on the loans when the interest rates spiked. As a result, the value of the mortgage securities plummeted, and banks and investors holding them lost billions. The debacle helped ignite the financial meltdown that plunged the economy into the deepest recession since the 1930s and brought a taxpayer bailout of banks.

The new rules will affect only a relatively small portion of the mortgage securities market, regulators say. Loans backed by Fannie, Freddie and the Federal Housing Administration aren’t subject to the 5-percent rule . The two companies and the federal agency together stand behind about 90 percent of new mortgages, and own or back more than $5 trillion worth of home loans.

On Monday, the head of the agency overseeing Fannie and Freddie announced that the companies have reached an agreement with major banks that could expand lending.

Mel Watt, director of the Federal Housing Finance Agency, said the deal clarifies conditions in which banks could be required to buy back mortgages they sell to Fannie and Freddie for misrepresenting the loans’ risks. He said the agreement in principle is “a significant step forward” that will help make more mortgage credit available without harming Fannie and Freddie’s finances.

 

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