Three years after it was proposed, one of the major post-crisis mortgage regulations is on track to be finalized — but on terms much looser than originally envisioned.
Intended to force lenders to keep some of the risk of loans, including home loans, that are packaged into securities and sold to investors, the final rule isn't likely to have a significant impact on the mortgage market, at least in the near term.
The regulation was “the single most important part” of the 2010 Dodd-Frank financial reform law, according to Barney Frank, the former Democratic chairman of the House Financial Services Committee for whom the law is named.
The rule was supposed to require lenders to maintain a 5-percent stake in loans that are packaged into securities, except for mortgages that met certain strict criteria for safety, called qualified residential mortgages, or QRMs.
the Wall Street Journal reported earlier this week that the Securities and Exchange Commission, the last holdout of the six regulatory agencies needed to approve the rule, has given the go-ahead to finalize a rule that would include a much broader definition of a QRM than originally planned. The industry is now expecting the rule to be finalized over the next few months.
When the rule was first proposed in April 2011, it had stringent requirements for loans that would meet the standards for qualification. It would have required a minimum 20 percent down payment, low debt-to-income ratios and tight credit history standards, among other criteria.
But after lenders and housing groups protested that the rule would stifle lending, the agencies -- the SEC, the Federal Reserve, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Federal Housing Finance Agency, and the Department of Housing and Urban Development -- backed off.
In October, they proposed instead to set the definition equal to the standards for a “qualified mortgage” determined by the Consumer Financial Protection Bureau. Both the CFPB and its mortgage standards were also creations of the Dodd-Frank Act.
The CFPB’s qualified mortgage definition does not specify a down payment and is generally more expansive than the first proposed QRM rule.
When the new definition was proposed in October, Frank called it a “grave error” in a letter to the regulators, adding that it repudiated the intent of Congress in requiring a stricter definition for mortgages for which lenders would not have to keep some of the risk. The idea behind the rule was to make lenders keep some "skin in the game." It is widely thought that a major cause of the housing crisis was that lenders let standards slip, knowing that risky mortgages could be sold off to investors in securities.
Ron Haynie, a vice president at the Independent Community Bankers of America, downplayed the significance of the revised terms of the rule, saying that if the CFPB did a good job setting mortgage standards, the new rule proposed by the SEC and other agencies shouldn't be too far from Congress’ intent. Noting that it’s been four years since Dodd-Frank was passed, he added that “it’s probably gonna be as good as or as close as you’re gonna get.”
For now, though, the QRM rule “wouldn't affect the current market,” according to the American Bankers Association's Bob Davis, because the bailed-out government-sponsored enterprises Fannie Mae and Freddie Mac dominate the secondary market, and as of earlier this year all loans they purchase have to meet the CFPB's qualified mortgage requirements, meaning they also would meet the QRM definition.
Over time, it’s likely that the QRM rule would affect more transactions, as the private market for securitizing mortgage revives, a prospect envisioned by both the House and Senate housing finance reform bills introduced over the past year. But Davis added that it’s likely “that we’ll see a discussion about the need for congressional action for flexibility” for non-qualifying mortgages under the risk retention rule. That’s a development mortgage bankers would welcome, as they are “pretty confident that in practice there will be no evidence supporting the need” for a down payment in loans that are sold off without lenders retaining risk.
That would mean easier credit terms. But it would also mark a dramatic departure from the Obama administration's original proposal.
CORRECTION: An earlier version of this article misidentified Bob Davis's employer; he is with the American Bankers Association. The Washington Examiner regrets the error.