U.S. gets religion on adopting mortgage standards
A time traveler from the 1950s would hardly blink at the standards American regulators are mulling for run-of-the-mill home loans. True, the new underwriting criteria that bank watchdogs have outlined for most standard mortgages appear to be a radical departure from the funky terms of products that borrowers had their choice of in recent years. But in fact, they are more a return to the conservative ways of the past.
The U.S. regulators — including the Federal Reserve, Federal Deposit Insurance Corp and Comptroller of the Currency — are hoping to rein in excessive risk-taking in the securitization of mortgages by issuing guidelines on “qualified residential mortgages.” In defining these, they’ve leaned on previous rules for safe lending. Notably, the 20 percent down payment — which had all but disappeared outside the rigid co-op boards of Manhattan — is back on the table, together with debt-to-income limits and lower home equity thresholds.
Such standards — considered draconian by some since many first-time home buyers can only afford down payments of around 5 percent — will cause some banks to squawk. Loans that don’t conform to the criteria can only be repackaged and sold to investors if the banks retain 5 percent of the bond. Regulators hope such rules will limit the mortgage-bond machinery of banks from going into overdrive again.
Future borrowers aren’t likely to be thrilled since it may mean their dream house will remain just that for a while longer. It takes more time to save $80,000 on a $400,000 home than $12,000. The good news for the economy as a whole, however, is that the proposed changes won’t have much of an impact on the housing market.
That’s because the rules are, for now, aimed at the private financial sector, not Fannie Mae and Freddie Mac , which still guarantee the vast majority of mortgages in the nation. The hope, though, is that these failed housing agencies will eventually leave a much smaller footprint on mortgage finance, which is why standards set today matter.
If the private sector fills the void, regulators need to keep standards high or risk backsliding into a dysfunctional home finance system. Banks may have to work harder for their profits and borrowers will have to save more before signing the papers. But after the housing market’s blow-up, that’s a worthy price to pay.