Relaxed mortgage regs could free up credit

Banking regulators voted Tuesday to relax mortgage rules meant to prevent risky lending practices, like those that helped spur the economic crisis, while also expanding access to credit for homebuyers.
 
The Federal Deposit Insurance Corp. (FDIC) became the first of a half-dozen agencies to approve a final qualified residential mortgage (QRM) rule required by the 2010 Wall Street reform law.
 

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The long-awaited regulations generally require lenders to keep at least 5 percent of the risk associated with loans on their books, thereby keeping their “skin in the game” in the event of default.
 
“The finalization of the rule should go a long way toward providing clarity to the markets and facilitating access to credit on sustainable terms,” FDIC Chairman Martin Gruenberg said.
 
The Federal Reserve and other regulators are expected to wrap up their work Wednesday on the rule, which stands as a victory for industry groups that balked at more stringent requirements floated in the wake of the economic crisis.
 
The final regulation, for instance, does not include steep down payment standards that were a part the initial draft and would have required borrowers to put up as much as 20 percent of the price of their home to qualify.
 
That provision, along with restrictive debt-to-income ratio and credit history requirements, sparked a torrent of comments from industry groups.
 
Ultimately, the final rule was drafted to hew closely to the related Consumer Financial Protection Bureau’s (CFPB) qualified mortgage (QM) regulations enacted in January to ensure borrowers have the ability repay their home loans.

Business groups heralded the regulations as providing a uniform set of standards that would help reduce regulatory burden by lowering compliance costs and, consequently, the cost of credit to consumers.
 
Frank Keating, president and CEO of the American Bankers Association, said the final rule will “encourage lenders to continue offering carefully underwritten QM loans and avoid placing further hurdles before qualified borrowers."

Richard Foster, vice president and senior counsel for regulatory and legal affairs for the Financial Services Roundtable, said that the rule will provide consumers with better access to mortgages because of the certainty provided by finalizing the rule.

Mel Watt, director of the Federal Housing Finance Agency, which had a hand in crafting the final rule, echoed the praise from industry groups, saying it strikes the proper balance between protecting the economy from risky practices and encouraging lending.

“Finalizing this rule represents a major step forward to providing greater certainty to the housing finance market and paves the way for increased participation by the private sector,” Watt said. “Lenders have wanted and needed to know what the new rules of the road are and this rule defines them.”

The rule’s adoption, however, was accompanied by some concerns that the restrictions leave the potential for unsound lending practices.

FDIC Vice Chairman Thomas Hoenig, who supported the rule, said the flexibility offered by the loosened language — particularly regarding the down payment provision — comes with a trade-off.

“This may facilitate greater homeownership, a goal we all share, but there are data to suggest it may increase the risk of borrowers will frequently default and lose homes, which is something we want to avoid.”

Another member of the panel, Jeremiah Norton, dissented, arguing that that by aligning the regulations with the previous CFPB rule amounts to an unlawful delegation of the agency's authority.

Norton also questioned language that would allow the rule to evolve in response to future changes to the CFPB rule.

CFPB Director Richard Cordray, who also sits on the FDIC board of directors, sought to assuage those concerns.

Cordray said it is important that regulators continue their diligence in making changes to mortgage rules along with the ebb and flow of the housing market.

“We should be on our toes all the time to review what's being done in the market and consider whether changes need to be made,” Cordray said.

National Association of Realtors President Steve Brown said the “synchronization with the QM rule will provide lenders with much needed clarity and consistency as they apply the new standards to loan applications while also providing a framework to bring more competition to the secondary mortgage market.”

Brown said he was pleased to see that the final rule nixed suggested 20 percent and 30 percent down payment requirements, which “would have denied millions of Americans access to the lowest cost and safest mortgages."

The regulations also include exemptions to the risk retention provision for certain commercial and low-risk loans, as well as those guaranteed by mortgage financing giants Fannie Mae and Freddie Mac as long as they remain under government control. 

But some housing market experts were less optimistic about whether the final rule would boost the housing market.

“It is important to realize that this rule will not have a significant impact in making mortgage credit more available, as there remain structural and market barriers that need to be addressed for the private label securities market to fully return,” said David Stevens, president and CEO of the Mortgage Bankers Association.

He said that linking QRM and QM only reinforces the need to address a QM patch, which provides qualified mortgage status to any loan that can be sold to Fannie and Freddie.  

As the debate continues in Congress over a paht for housing finance reform, Stevens said that policymakers "need to ensure the QM definition can stand alone, independent of the future of the GSEs."

The Treasury Department oversaw the coordination of the rule-writing process along with the agencies tasked with its drafting: the FDIC, Office of the Comptroller of the Currency, Federal Reserve Board, Federal Housing Finance Agency, Securities and Exchange Commission, and the Department of Housing and Urban Development.

Last updated at 3:50 p.m.