August 29th, 2013
On Aug. 28, six federal agencies released a new proposal that is intended to reduce homebuyers’ risk when taking out a mortgage loan. These 500-plus pages of rules are an update of a 2011 proposal, according to Reuters.
One of the main changes included in the proposal is the requirement for lenders to keep a stake in the loans they bundle and sell as securities. This is also referred to as the “skin in the game” rule. Officials believe this regulation will help minimize the type of underwriting practices that contributed to the housing bubble.
According to Reuters, during the years leading up to the financial crisis, banks implemented poor underwriting standards because they assumed that if a borrower defaulted, they could simply sell loans to investors and avoid any negative consequences.
By forcing banks and bond issuers to keep part of their loans on the books, they will ideally be discouraged from writing risky loans. And even if they do utilize poor standards again, they will no longer be able to avoid direct repercussions.
“Our goal as regulators is to provide clear rules that allow for robust markets that meet the needs of creditworthy borrowers in a safe and sound manner,” Paul Nash, a senior official at the Office of the Comptroller of the Currency, told Reuters. “I believe the rule, as re-proposed today, helps accomplish just that.”
Discontinuation of a prior down payment requirement
Along with instituting the “skin in the game” rule, the agencies’ proposal will also eliminate a mortgage down payment requirement that was previously enforced.
According to The Inman News, under the earlier proposal, if a borrower made a down payment of less than 20 percent, the lender was required to keep a 5 percent “risk retention” stake when the loan was securitized. However, loans with loan-to-value ratios less than 80 percent would be exempt from the this risk retention requirement.
This initial policy caused issues with real estate trade groups, who insisted it would force borrowers making down payments less than 20 percent to pay higher rates.
As of Aug. 28, this down payment requirement been eliminated, and qualified residential mortgages will now be defined under the guidelines of the Consumer Financial Protection Bureau.
This “will encourage lenders to continue offering carefully underwritten QM loans, including those with lower down payments,” the American Bankers Association said in a statement. “As a result, it will help the economy and ensure the largest number of creditworthy borrowers are able to access safe, quality loan products at competitive prices.”