New regulations proposed by the administration that would housing finance tougher are not in line with what Congress intended in passing financial reform, say a bipartisan handful of Senators.
The legislation, enacted last year, required banks that pool mortgages and sell them as securities to retain at least a 5 percent stake in those loans. The idea was that banks should have some ?skin in the game? instead of selling off the loans and hence avoiding losses should the loans go bad.At the time, a group of senators ? led by Sens. Johnny Isakson (R-Ga.), Mary Landrieu (D-La.) and Kay Hagan (D-N.C.) ? successfully pushed to carve out exceptions for certain types of relatively safe mortgages. They left it up to regulators to determine which loans should be exempt.
...Congress instructed the regulators to consider other factors such as a borrower?s debt, his or her ability to repay the loan, and the features of the loan itself when deciding which loans to exclude from the risk-retention provision, the senators said.
But by raising the 20-percent-down issue, regulators strayed from the intent of the law, said Hagan, whose state includes large mortgage insurance firms. Many lenders require borrowers to pay private mortgage insurance if they put down less than 20 percent. In a letter to regulators, the senators said loans with that kind of insurance result in lower losses for lenders and fewer foreclosures than similar loans that lack insurance.
Regulators have decided that the only loans which should be exempt are those in which the homebuyer comes up with at least a 20% down payment, a threshold that lawmakers argue is far too high for most borrowers. Judging by statistics, they're right: 6 out of 10 borrowers, according to LPS Applied Analytics as quoted in this story, put less than 20% down. The Treasury Department is taking public comment on the regulations now, and is hearing an earful.
[M]embers of the Congressional Black Caucus said that even a 10 percent minimum would not be good enough. In a letter to regulators last week, they said the proposal would hurt low- and moderate-income families.?Instead of allowing creditworthy individuals to participate in the American dream of homeownership, a 20 percent ? or even a 10 percent ? minimum down-payment requirement could relegate them to long term rental status? and draw out the housing crisis, Rep. Emanuel Cleaver II (D-Mo.), the caucus chairman, said in the letter.
Setting the minimum down payment for a "safe" loan at 20% could lead banks to stop lending to borrowers who have less to put down, thereby taking the majority of buyers (if LPS Applied Analytics numbers are correct) effectively out of the market. Which in turn will make an already sluggish housing market crawl to an effective stop. Forcing the banks to be responsible in the mortgage securitization process shouldn't require taking so many would-be homeowners out of the game.
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