New Rules Seek to Cut Mortgage Risk, Improve Underwriting Practices

Wednesday, 28 Aug 2013 08:18 AM

 

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U.S. regulators on Wednesday unveiled a reworked proposal to reduce risk in the mortgage market by requiring lenders to keep a stake in the loans they bundle and sell as securities.

The Federal Deposit Insurance Corp. approved a new version of the stricter 2011 proposal designed to limit the type of shoddy underwriting practices that fueled the housing bubble.

The revised proposal would mainly require banks and bond issuers to retain a portion of mortgages when borrowers are spending more than 43 percent of their monthly income to repay loan debt.

Editor’s Note: Put the World’s Top Financial Minds to Work for You

The original plan initially drew wide criticism. The revised plan loosens the definition of "qualified residential mortgages" that are exempted from the regulations. Regulators received more than 10,000 comments on the first proposal that sparked alarm across the housing industry and among consumer groups.

Regulators originally said banks and bond issuers would have to keep "skin in the game," or hold part of securitized loans on their books, unless the mortgage included a 20 percent down payment.

In the new proposal that is set for public comment, regulators eliminated the down payment requirement for qualified residential mortgages.

Those opposed to the original proposal with the 20 percent down payment had feared the rules could restrict access to credit for some low-income borrowers.

Instead, mortgages that meet a minimum standard already approved by another regulatory agency will be considered exempt from the risk retention rules.

Editor’s Note: Put the World’s Top Financial Minds to Work for You


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