Last week, U.S. federal regulators announced it would be easier for banks to package and sell mortgage securities.
Borrowers will no longer be required to make a 20% down payment, which reverses a rule that was implemented after the crisis to limit risky lending.
That rule had also required banks to hold at least 5% of the mortgages they sell.
But last week’s rules, which are expected to come into effect in fall 2015, mean that banks can avoid the 5% rule if they verify a borrower’s ability to pay back the loan, and his debt doesn’t exceed 43% of his income.
Some are wondering if it’s too soon to loosen lending requirements — notably SEC commissioners Daniel Gallagher and Michael Piwowar, as reported in The Wall Street Journal.
However, one expert applauds the change.
“The initial proposal that a mortgage was defined as low-risk based on a 20% down payment was too restrictive,” says Michael J.R. Nisker, managing partner of Trez Capital. “Since the financial crisis, banks have been very conservative in their lending practices and, as a result, even with historically low interest rates the national housing market is still rather weak.”
The move is meant to spur lending, which will in turn aid financial markets and economic recovery.
“By dropping the down payment requirement for qualifying mortgages, first-time buyers and lower- and middle-income buyers will be able to realize the dream of home ownership,” he says.
But given that the new rules only affect a small percent of mortgages (those not backed by powerhouses Fannie, Freddie and the Federal Housing Administration), will it have an impact?
Nisker says likely not. As a result, the U.S. housing market still has a long way to go before it recovers. “Sales activity has subsided over the past couple of quarters and the resale market is essentially flat on a year-over-year basis.”
Still, he adds, certain states are performing well. For example, Texas is a strong market.
“Employment growth in Texas is one of the highest nationally. New home inventory is low, and thus demand is far outstripping supply, which has led to healthy price appreciation. In fact, there are only two American cities where prices have surpassed their pre-crash high levels: Dallas and Denver.”
The median price for a Dallas-area home is about $245,000, which is about 5% higher than the record level in 2007, he says.