Following the debacle of free-and-easy mortgage money to anyone who could fog a mirror in the run-up to the last housing bubble (remember that was just 6 years ago), regulators proposed 'skin-in-the-game' rules which forced banks to hold certain amounts of the loans they made (as opposed to securitizing and selling off that yieldy risk to the next greater fool). Makes sense.
However, in a major U-turn, with interest rates rising, mortgage rates spiking, and home prices now collapsing once again [10], it would appear the very same congress has folded.
As the WSJ reports [11], more stringent lending standards on top of the market environment leave the watchdogs, which include the Fed and the FDIC, wanting to loosen a proposed requirement that banks retain a portion of the mortgage securities they sell to investors (representing a victory for an unusual alliance of banks and consumer advocates that opposed the new rules).
Undermining the initial goal of imposing market discipline, former FDIC Chair Sheil Bair noted, "My sense is that Washington has lost its political will for serious reform of the securitization market." Indeed it has, Sheila.
Via WSJ [11],
Plan made sense until the potential for a bubble popping began...
Concerned that tougher mortgage rules could hamper the housing recovery, regulators are preparing to relax a key plank of the rules proposed after the financial crisis.
The watchdogs, which include the Federal Reserve and Federal Deposit Insurance Corp., want to loosen a proposed requirement that banks retain a portion of the mortgage securities they sell to investors, according to people familiar with the situation.
...would be a major U-turn for the regulators charged with fleshing out the Dodd-Frank financial-overhaul law passed three years ago.
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So Regulators fold (under pressure from the industry)...
"My sense is that Washington has lost its political will for serious reform of the securitization market," said Sheila Bair, who served as FDIC chairman until 2011.
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The idea was to ensure that the firms had "skin in the game," addressing problems that arose when lenders didn't pay close attention to the quality of loans issued as securities so long as the bonds could receive triple-A ratings.
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Now, regulators want to scrap that requirement, meaning that banks would have to retain 5% only of mortgages that allow borrowers to make "interest-only" payments or that don't fully document a borrower's ability to repay a mortgage - a much smaller portion of the market that includes the riskiest loan products that caused much of the crisis-time losses.
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Gotta keep blowing that bubble...
In dropping the minimum down payment from the rule making, analysts say that regulators appear to be listening amid rising concerns that restrictive lending standards have yet to thaw significantly in the aftermath of the downturn, which could make it harder for housing markets to recover.
Opponents of the down-payment rules have said that down-payment standards should be set by the market and not by regulators. They have argued that shoddy loan products and lenders' carelessness in determining a borrower's ability to repay a loan - not down payments - were bigger contributors to the mortgage crisis.
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And Ben is leading the de-regulation charge...
Earlier this month, banking regulators jettisoned a proposal that would have required banks to raise more capital for certain mortgages, particularly those to borrowers who have made smaller down payments, citing a clutch of other impending mortgage rules.
"One of the risks that we face now is that there is still a pretty significant part of the population that is having considerable difficulty accessing mortgage credit," even though they may be credit-worthy, said Federal Reserve Chairman Ben Bernanke last week in testimony on Capitol Hill.
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And we already know ARMs are on the rise once again [12] as brokers push whetever product brings the monthly nut down to 'affordable' levels... as homebuilders admit rates are impacting their business [13]... it seems we really will never learn.