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Real Estate: Feds move on home mortgage rules

New mortgage rules are up for public comment.

“The intent of this rulemaking is not to kill private mortgage securitization — the financial crisis has already done that.”

~FDIC Chair Sheila Bair

SUMMIT COUNTY — In a move that will ultimately have long-term implications for the real estate market in Colorado and across the country, federal regulators this week announced one of their proposals to restructure home lending rules.

Click here to read the federal notice and to comment.

The Federal Deposit Insurance Corporation and the Federal Reserve now want public comment on the plan, which would require  lenders to offer mortgages with at least a 20 percent down payment if they want to repackage the loan to sell to other investors without keeping some of the risk on their books.

“The rule before the Board today proposes new standards for retention of credit risk to help ensure that securitizers will hold ‘skin in the game’ which will align their interests with those of bondholders,” FDIC chair Sheila Bair said in a press release. “This market needs strong rules that assure investors that the process is not rigged against them. The intent of this rulemaking is not to kill private mortgage securitization — the financial crisis has already done that,” she said, referring to to the collapse of the market for securitized mortgages that affected entire countries — Iceland, for example, where national banks had invested heavily in the mortgage market.

The Dodd-Frank financial law passed last year requires companies that package loans into securities to keep at least 5 percent of the credit risk on their books.

The private securitization market created more than $1 trillion in mortgage credit annually in its peak years of 2005 and 2006, but virtually ceased to exist in the wake of the financial crisis. Issuance in 2009 and 2010 was just 5 percent of peak levels.

“This market needs strong rules that assure investors that the process is not rigged against them. Our intent is to restore sound practices in lending, securitization and loan servicing, and bring this market back better than before,” she said.

Housing market experts said the rule would have little short-term impact because investors are not exactly rushing to buy repackaged mortgages after being burned so completely less than two years ago. The new rule also wouldn’t affect loans sold to Fannie Mae and Freddie Mac, although those two federally backed mortgage finance institutions are headed toward oblivion under an overall restructuring of the mortgage finance markets proposed by President Obama.

More than half of the subprime loans made in 2006 and 2007 that were securitized ended up in default, which hurt both borrowers and investors and triggered the financial crisis, Bair explained. By aligning the interests of borrowers, securitizers and investors, the new rules will help to avoid these outcomes and keep default rates at much lower levels. They will also help avoid another securitization-fed housing bubble which made home prices unaffordable for many borrowers, she concluded.

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