WASHINGTON – Federal regulators last week softened a proposed rule that would require banks to keep a stake in home loans that they parcel out to investors, for fear that the policy would disrupt the nascent housing recovery.
The move will likely quiet the outcry from industry groups and housing advocates who have cautioned against strict rules that could freeze home buyers out of the market. Banks have warned that a pile-on of new mortgage regulations would raise their costs and ultimately make it more difficult or expensive for consumers to get a loan.
In response, six agencies, including the Federal Reserve, have loosened the definition of the types of home loans – known as qualified residential mortgages or QRM – that are deemed secure enough to be exempt from the extra requirements.
Regulators initially defined qualified residential mortgages as those with at least a 20 percent down payment and no more than a 36 percent debt-to-income ratio. That 2011 proposal raised fears that the definition was so strict that it would limit access to credit for low- and moderate-income Americans.
The new 505-page proposal has eliminated the down payment requirement and raised the debt-to-income ratio to 43 percent. On loans that do not meet that threshold, banks and bond issuers will have to keep a 5 percent interest in the mortgages as they get bundled into securities for investors. That’s to make the banks retain some of the risk and prevent a repeat of the shoddy mortgage securities created during the financial crisis.
The revisions align the QRM rule with the existing qualified mortgage rule, a measure finalized in January by the Consumer Financial Protection Bureau that aims to determine whether a borrower can repay a home loan. Mirroring the CFPB’s rule means that in order to qualify for the exemption, banks would have to adhere to restrictions that prohibit interest-only loans, balloon payments and other harmful mortgage features.
Lenders that issue loans using the government criteria would receive broad legal protections against borrower lawsuits. As a result, analysts expect that banks will primarily churn out mortgages that adhere to the standards.
David Stevens, president of the Mortgage Bankers Association, praised regulators for taking into consideration “that the (original) proposal would have unduly constrained the availability of mortgage credit for many borrowers.”
But the fight may not be over. The new proposal asks for comment on a much tougher alternative plan that would hike the down payment requirement up to 30 percent. It would also limit the qualified residential mortgage label to home loans with a maximum 70 percent loan-to-value ratio that adhere to key components of the CFPB rule.
“Although the mortgage industry won big with the QRM equals QM proposal, it will have to fight hard to keep it,” said Karen Shaw Petrou, managing partner of Federal Financial Analytics. “We anticipate the final rule will strike a middle path. This will be between the no-down-payment proposal and the 30 percent option, ending up at 10 percent.”