Mortgage rules eased to spark lending
Both banks, borrowers are likely to benefit
WASHINGTON – Buying a home may have gotten a little easier this week.
With the financial crisis and subprime mortgage bust receding further into history, the government is loosening some financial rules, hoping to inject more life into the country’s still-recovering housing market.
Both banks and borrowers stand to benefit from the new rules unveiled Tuesday by six federal agencies. While banks will see relaxed guidelines for packaging and selling mortgage securities, fewer borrowers likely will need to make hefty down payments. The board of the Federal Deposit Insurance Corp. voted 4-1 Tuesday to adopt the new rules, and two other agencies approved them as well. The Federal Reserve has scheduled a vote for today, and two other agencies are expected to adopt the rules soon.
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 include the less stringent condition that borrowers not carry excessive debt relative to their income.
The rules for the multitrillion-dollar market for mortgage securities will take effect in a year. For other kinds of securities such as those bundling together auto loans or commercial loans, which don’t allow banks an exemption from the 5 percent rule, the effective date is in two years.
The rules, first proposed in 2011, were mandated by the overhaul law enacted in the wake of the 2008 financial crisis. The idea was 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.
Some critics warned that abandoning the 20 percent down payment condition could bring a return to the dangerous days of borrowers taking on heavy mortgage loans that they aren’t in a position to repay.
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, when anxiety over reckless lending gripped lawmakers.
“Credit has dried up for a long period and (lending) standards have tightened dramatically,” he said.
Experts say it’s hard to predict whether the regulators’ move will actually boost mortgage lending and the housing market.
The new rules will affect only a relatively small portion of the mortgage securities market, regulators say. Loans backed by Fannie Mae, Freddie Mac and the Federal Housing Administration aren’t subject to the 5 percent rule.