After several years of back-and-forth debate, U.S. regulators finalize a more relaxed set of mortgage standards. This new set of rules is a win for the real estate industry.
The Federal Reserve, Securities and Exchange Commission and Department of Housing and Urban Development approved the new rules for the mortgage-backed securities market, a day after three other agencies approved the standards. The regulators’ actions came over the objections of two SEC commissioners, who warned the rules would do little to prevent a return to the kind of lax mortgage underwriting that fueled the financial crisis.
The rules are intended to improve the quality of loans by giving banks a financial incentive to ensure mortgages can be repaid. The initial rules required that banks hold 5% of the risk of mortgages packaged and sold to investors or require a 20% borrower down payment. But regulators, concerned that overly stringent rules would harm the housing market’s recovery, backtracked on the 20% down payment.
Instead, banks will be able to avoid the 5% risk-retention requirement if they verify a borrower’s ability to pay back the loan and comply with other requirements, such as a requirement that a borrower’s debt payments not exceed 43% of their income. The rules represent an effort to ensure that more mortgage loans are available to consumers, officials said.
These new set of rules will hopefully avoid a repeat of the real estate melt-down in 2008. The regulation is “another important step in implementing the Dodd-Frank Act and in enhancing stability in the securitization market,” said Fed Chairwoman Janet Yellen.
The rule, which goes into effect in fall 2015, will be reviewed for its impact on the economy four years later, and every five years after that.
For more information, visit yesterday’s article in the Wall Street Journal.