(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)
By Daniel Indiviglio
WASHINGTON, Aug 28 (Reuters Breakingviews) - U.S. regulators have at least come up with simpler mortgage bond rules. They have reworked heavily criticized proposals for how much of their own structured finance cooking banks must eat. Though the watchdogs have given ground on down payments, the streamlined requirements are a step toward greater mortgage market confidence.
That a 500-page document can serve to simplify regulations only emphasizes the complexity of the Dodd-Frank reforms enacted in 2010. But half a dozen regulators have managed to agree on enough to achieve that. One important fix is that a so-called qualified residential mortgages, or QRMs, would under the new draft have the same characteristics as the main consumer finance watchdog’s “qualified mortgages,” defined in January. A securitization of QRMs is exempt from requirements that banks hold onto a slice of it, while a qualified mortgage spares them some legal exposure. Harmonizing the two is for the most part a no-brainer.
But one concession involved in doing so looks like a defeat for the watchdogs. In coordinating the two definitions, the latest plan drops a previous requirement that a mortgage would only count as a QRM if the loan was for 80 percent or less of a newly purchased home’s value. That would have set a prudent new market standard. The relaxed version will surely see mortgage credit flowing more easily, but it leaves a smaller buffer against a future housing and mortgage crunch.
Regulators also simplified how banks creating mortgage-backed securities that don’t have the QRM exemption must hold risk. Initially, they proposed a set of complicated options and also wanted originators to use some securitization profits to cushion possible losses. Lending institutions complained this would have made securitization – traditionally an important source of liquidity in U.S. mortgage markets – too expensive. The new iteration gives lenders more flexibility.
There are pros and cons. But with a version of QRM that the industry can stomach now in place bar the fine print, lenders can finally start to see more clearly what the future of U.S. home lending will look like. There’s still one big uncertainty, however, and that’s in the hands of lawmakers: What to do about reforming defunct mortgage guarantors Fannie Mae FNMA.OB and Freddie Mac FMCC.OB.
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- Six U.S regulators on Aug. 28 proposed a revised version of a rule that would determine how much risk banks must retain when creating securities based on home loans. A so-called qualified residential mortgage or QRM is now likely to have the same features as the “qualified mortgage,” a separate definition established by the Consumer Financial Protection Bureau in January. The earlier version of the QRM rule, proposed in March 2011, would have specified a 20 percent minimum down payment for new mortgages, something not included in the CFPB’s qualified mortgage definition.
- Banks will be required to keep 5 percent of the risk for any loan they originate that is not a QRM. The new proposal simplifies retention requirements compared to the earlier version. The revised plan also allows banks to mark their retained exposure at fair value instead of par value. Finally, the new rule abandons a previous proposal that some of a bank’s securitization proceeds should be kept aside as an additional cushion against losses.
- Agencies revise proposed risk retention rule (Press release): link.reuters.com/sew62v
- Reuters: New U.S. rules to cut mortgage risk, improve underwriting practices [ID:nL2N0GS1GU]
Not so retentive [ID:nL1N0FU19K]
Under(writing) armor [ID:nL1E9CA4B9]
- For previous columns by the author, Reuters customers can click on [INDI/]
(Editing by Richard Beales and Emily Plucinak)
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