Regulators cave in to bankers who want to make bad loans with impunity

Under pressure from real estate industry lobbyists, government regulators completely cave in and allow banks to underwrite bad loans with no risk retention.

walk_awayIn what can only be described as a complete abdication of responsibility, government regulators will allow banks to underwrite no-money down loans without retaining the mandated 5% risk retention on their books. The last vestige of hope for a stable real estate market was set aside so lenders can make more money by putting unstable and unqualified borrowers into loans they shouldn’t be given — and taxpayers will likely pick up the tab when these loans go bad.

The 5% risk retention provision is part of the Dodd-Frank financial reform bill. It’s designed to force lenders to put “skin in the game” if they underwrite loans outside the safe harbor of the qualified mortgage rules. Without this risk retention, lenders can make risky — and ultimately bad — loans, and as long as some investor is willing to buy the mortgage-backed security pool, lenders can pass all risk on to others. There is no question such a move will embolden lenders to loosen lending standards and give loans to unqualified borrowers.

Is this a good idea? Is this something taxpayers should be happy with; after all, taxpayers insure over 90% of the loans underwritten today, so much of this risk will get passed on to the taxpayer through GSE loan guarantees. I find this outrageous.

Loosened Mortgage Rule Advances After SEC Drops Objection

Rule Wouldn’t Include Down-Payment Requirement

By Alan Zibel and Andrew Ackerman, June 10, 2014 9:07 p.m. ETlower_standards

WASHINGTON—A relaxed rule aimed at improving mortgage quality moved closer to approval after the Securities and Exchange Commission removed a key objection, according to officials familiar with the process.

The compromise approach is designed to assuage some regulators’ concerns that the rule may not go far enough to prevent the type of lax underwriting that helped fuel the 2008 financial crisis, the officials said. The SEC won a concession in which U.S. policy makers are expected to agree to re-evaluate, and potentially adjust, the rule two years after its effective date and every five years after that.

If they lost the battle with lobbyists now, what makes them think they will have a better chance in two years?

The standard, expected to be made final in the coming months, is much looser than what was first floated in 2011, when policy makers said borrowers would have to put 20% down to get a loan or lenders would have to retain 5% of a loan’s risk once it was packaged and sold to investors.

Under the revised approach, regulators wouldn’t require a down payment and would include a broad exemption for banks and other issuers of mortgage-backed securities from having to retain a portion of the credit risk on their books.

They gave lobbyists everything they wanted, and their “concession” is to review it two years from now? This isn’t much of a concession. IMO, it doesn’t save face.


Regulators have struggled to complete the rule in the face of concerns from the SEC, which objected to the loosened approach and said borrowers should be required to make some type of down payment to get a so-called qualified residential mortgage, said government officials close to the process.

The SEC is right to be concerned about underwriting loans with no-money down. Historically, no-money down loans don’t perform very well.


That position put the SEC at odds with other regulators, who shared the housing industry’s concerns that any down-payment requirement could crimp access to credit and impede the fragile housing recovery.

Fragile housing recovery? Have you noticed that most financial media reporters work feverishly to convince everyone the housing recovery is durable, but when lobbyists what to relax lending standards, the recovery is suddenly fragile?

SEC Chairman Mary Jo White detailed her concerns about the rule, including the lack of a down payment, at a March 24 meeting at the Treasury Department with the heads of the other five agencies writing the rule, officials said. Ms. White’s concerns were shared by the SEC’s two Republican commissioners, Daniel Gallagher and Michael Piwowar, who wrote dissents to a version of the rule proposed last year.

Ms. White recently agreed to essentially adopt the revised mortgage rule without a down payment as long as regulators agree to re-evaluate the rule and ensure it is imposing restraint on the mortgage-backed securities market, these people said.

The move comes amid pressure from officials at other agencies, who argued a significant down-payment requirement could harm the fragile housing market, said people familiar with the matter.

I_want_to_believeThe key argument that won the day was that the housing recovery is fragile. So which is it? Is the housing recovery fragile or durable?

The Obama administration has begun trying to relax some of the postcrisis efforts to tighten mortgage-lending standards over concerns that the housing sector, traditionally an engine of economic recovery, is struggling to shift into higher gear. The overseer of mortgage firms Fannie Mae and Freddie Mac recently said the companies should make more credit available to homeowners, reversing previous directives to tighten credit.

Don’t forget that all GSE loans carry the full faith and credit of the US government as their backing. You and I will be on the hook when these loans go bad.

The SEC’s change of heart is the latest twist in a three-year battle over the 2010 Dodd-Frank mortgage rule, intended to improve the quality of loans by ensuring banks retain a stake in mortgages they make, package and sell to investors. Regulators have been struggling to define which types of high-quality loans would be exempt from the risk-retention requirement.

The original proposal three years ago sparked a backlash among housing-industry, affordable-housing and civil-rights groups, who banded together over shared concerns that a 20% down-payment requirement would end the dream of homeownership for many Americans.

Last year, regulators issued a new proposal with two options: Eliminate the down-payment requirement in favor of mortgage-lending rules written by the Consumer Financial Protection Bureau that required banks to verify a borrower’s ability to repay a loan—or boost the downpayment requirement to 30%.

They put a 30% down payment requirement out there as an option, so regulators are forced to chose between a 30% down payment and a 0% one. Since nobody advocates a 30% down payment requirement, that option will not be chosen. That leaves us with a 0% down payment requirement.zero_down_mortgage

What would have happened if they had proposed splitting the difference at 10%? Well, that would have been a reasonable compromise with solid reasoning for its inclusion. Since the lobbyists didn’t want that to be a possibility, they put the red herring number of 30% out there to make it look as if they seriously considered a down payment requirement when in fact they killed it.

The transparency of this obvious ruse infuriates me. However, nobody in the mainstream media has picked up on this.

Most agencies, under pressure from lawmakers, the housing industry and consumer groups rallied around the first option.

What a surprise… not.

But the SEC remained the lone holdout, frustrating other government officials who had been working on the issue for years and had hoped the rules would be completed soon, according to people familiar with the process.

The agency’s two Republican commissioners still are likely to vote against the final rule over concerns it won’t impose enough discipline on Wall Street when packaging assets such as mortgages into securities.

Messrs. Gallagher and Piwowar also say it is inappropriate to adopt a rule essentially written by another agency—the CFPB—which isn’t part of the mortgage-securities rule-making process. “We should not abdicate our responsibility to define [the mortgage standards] by surrendering the definition to the CFPB,” Mr. Piwowar said in a statement.

I couldn’t agree with them more. The SEC completely abdicated their responsibility, and the US taxpayer will be on the hook for the losses from the next housing bubble.

Everyone should be concerned about this move, but unfortunately, the public is no longer engaged in this issue, and with the real estate lobby pressuring regulators, I’m not surprised to see this disheartening outcome.


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