New rules adopted in hopes of spurring home loans

Buying a home may have gotten a little easier this week.

With the financial crisis and subprime mortgage bust receding further into history, the government is loosening some financial rules, hoping to inject more life into the country's still-recovering housing market.

Both banks and borrowers stand to benefit from the new rules unveiled Tuesday by six federal agencies. While banks will see relaxed guidelines for packaging and selling mortgage securities, fewer borrowers likely will need to make hefty down payments. The board of the Federal Deposit Insurance Corp. voted 4-1 Tuesday to adopt the new rules, and two other agencies approved them as well. The Federal Reserve has scheduled a vote for Wednesday, and two other agencies are expected to adopt the rules soon.

The regulators have dropped a key requirement: a 20-percent down payment from the borrower if a bank didn't hold at least 5 percent of the mortgage securities tied to those loans on its books. The long-delayed final rules include the less stringent condition that borrowers not carry excessive debt relative to their income.

The rules for the multitrillion-dollar market for mortgage securities will take effect in a year. For other kinds of securities such as those bundling together auto loans or commercial loans, which don't allow banks an exemption from the 5-percent rule, the effective date is in two years.

The rules, first proposed in 2011, were mandated by the overhaul law enacted in the wake of the 2008 financial crisis. The idea was to limit the kind of risky lending that brought on the crisis. If banks have more of their own money invested in mortgage securities — so-called "skin in the game" — they won't be as likely to take excessive risks, the thinking goes.

Some critics warned that abandoning the 20-percent down payment condition could bring a return to the dangerous days of borrowers taking on heavy mortgage loans that they aren't in a position to repay.

After three years of interagency haggling, the regulators' final, compromise approach was to adopt the Consumer Financial Protection Bureau's definition of a "qualified" mortgage. It excludes the kind of risky practices that fueled the crisis, such as mortgages issued without any supporting documents from borrowers.

CFPB Director Richard Cordray, a member of the FDIC board, noted at Tuesday's meeting that conditions in the mortgage market have changed since the financial crisis, when anxiety over reckless lending gripped lawmakers.

"Credit has dried up for a long period and (lending) standards have tightened dramatically," he said.

Experts say it's hard to predict whether the regulators' move will actually boost mortgage lending and the housing market. Anthony Sanders, a real estate finance professor at George Mason University, also suggested that it could re-open the door to risky lending.

"The problem facing the housing and mortgage markets is too few borrowers with sufficient income to pass debt-to-income rules," Sanders said. "Lowering the down payment requirement misses the point. So now we are putting poorer households in low-down payment loans — again?"

Through the years since Congress called for a sweeping revamp of regulation for banking, derivatives trading, securities and more, regulators have slogged through scores of complex rules.

The decision of the regulators to drop the 20 percent down payment requirement for banks to escape "skin in the game" for mortgage securities was a big win for finance industry lobbyists and advocates for affordable housing, noted Cornelius Hurley, a former counsel to the Federal Reserve who heads Boston University's Center for Finance, Law and Policy.

The regulators' work on the rules "attracted the essence of the housing industrial complex," Hurley said. "They all came out of the woodwork."

Industry groups talked up the potential impact on lending.

The new rules "will give the financial services industry more confidence and certainty, enabling lenders to provide high-quality mortgage loans to creditworthy consumers," the Financial Services Roundtable, whose members include the largest banks, said in a statement.

Ahead of the crisis, banks packaged and sold to investors bundles of risky mortgages with teaser rates that ballooned after only a few years. The banks had very little of their own money invested. Many borrowers ended up defaulting on the loans when the interest rates spiked. As a result, the value of the mortgage securities plummeted, and banks and investors holding them lost billions. The debacle helped ignite the financial meltdown that plunged the economy into the deepest recession since the 1930s and brought a taxpayer bailout of banks.

The new rules will affect only a relatively small portion of the mortgage securities market, regulators say. Loans backed by Fannie Mae, Freddie Mac and the Federal Housing Administration aren't subject to the 5-percent rule. The two companies and the federal agency together stand behind about 90 percent of new mortgages, and own or back more than $5 trillion worth of home loans.

On Monday, the head of the agency overseeing government-controlled Fannie and Freddie announced that the companies have reached an agreement with major banks that could expand mortgage lending. The deal clarifies conditions in which banks could be required to buy back mortgages they sell to Fannie and Freddie for misrepresenting the loans' risks.