Tuesday, March 29, 2011

Proposed New Mortgage Lending Rules

by Calculated Risk on 3/29/2011 03:56:00 PM

Earlier, several regulators released proposed new mortgage lending rules. Here is the press release from the Federal Reserve.

And here is the 233 page document.

Alan Ziebel at the WSJ has an overview: Regulators Unveil Mortgage-Lending Rules

The proposal ... is designed to encourage safer lending practices by mandating that issuers of mortgage-backed securities either follow conservative principles, such as requiring 20% down payments for mortgages, or hold a portion of the loans on their books. Companies that package loans into securities would have to hold at least 5% of the credit risk, unless the loans meet an exemption for high-quality loans.

... The proposal requests public comment on an alternative approach that would allow for a 10% down payment and mortgage insurance.

It also recommends that homeowners spend only 28% of their pretax income on their primary mortgage and 36% on total debt ...
I've noted before that a 10% down payment with mortgage insurance seems reasonable. These front end and back end debt-to-income (DTI) guidelines used to be pretty standard.

It is important to note that more risky loans can still be made - but the lender has to hold some of the credit risk (a "skin in the game" incentive to adequately underwrite the loans).

Lenders are arguing for a little more flexibility to meet the qualified residential mortgage (QRM) exemption, from the MBA:
"While factors like downpayment, debt to income (DTI) ratio and past payment history can be accurate predictors of loan performance, we do not believe that each ought to be considered independently.

"Rather, the rule should allow for consideration of a borrowers entire credit profile before determining whether risk retention is necessary on a given loan. For example, we believe that a lower downpayment loan could be less risky if a borrower has a strong history of making payments on time and if the borrower's debt to income ratio is on the lower end of the scale. The rule should provide more flexibility in this regard."
My reaction is the rule is fine (I'd go with the 10% down payment and mortgage insurance). For the riskier loans, the lender can hold on to some credit risk (a great incentive to properly underwrite the loan).