The Securities and Exchange Commission voted 3-2 to adopt the rules, which six federal agencies have been working on since 2011. Three other agencies adopted the rules Tuesday, and the Federal Reserve has scheduled a vote for Wednesday afternoon.
With memories of the subprime mortgage bust receding, and with regular home buyers still not returning to markets in earnest, regulators are looking to inject more life into the housing market.
The rules govern the amount of risk banks must take on when packaging and selling mortgage securities in a multitrillion-dollar secondary market for those loans. Regulators have dropped a key requirement from the final rules: a 20% down payment from the borrower if a bank didn’t hold at least 5% of the mortgage securities tied to those loans on its books.
The final rules include the less stringent condition that borrowers not carry excessive debt relative to their income. These requirements are similar to those in place prior to development of so called “liar loans” and other no money down offerings that vastly skewed loan-to-value ratios of U.S. home loans.
The rules for the market for mortgage securities will take effect in a year. They were mandated to limit the risky lending that brought on the crisis. If banks have more of their own money invested in mortgage securities – so-called “skin in the game” – they won’t be as likely to take excessive risks, the thinking goes.
SEC Chair Mary Jo White said at Wednesday’s meeting the new rules strike a balance between two objectives of the financial overhaul law: “protecting investors and not unnecessarily inhibiting the residential mortgage market.”
Some critics warn that abandoning the 20% down payment condition could bring a return to the dangerous days of borrowers taking on heavy mortgage loans that they aren’t in a position to repay. Industry groups, meanwhile, are talking up the eased rules’ potential impact on lending.
Many, though, have stressed the 20% down payment requirement has spurred a lot of speculative home buying by investors intending to rent homes out while waiting for prices to rise. Such investors can obtain the capital to cover the higher down payments, freezing out buyers who would occupy the homes.
After three years of interagency haggling, the regulators’ final, compromise approach was to adopt the Consumer Financial Protection Bureau’s definition of a “qualified” mortgage. It excludes the kind of risky practices that fueled the crisis, such as mortgages issued without any supporting documents from borrowers.