Regulators took a big step Tuesday in reshaping the nation's mortgage market. The Federal Deposit Insurance Corp. introduced a new rule that aims to rein in the excesses that inflated the housing bubble.
At the height of the bubble, lenders made a lot of really questionable mortgages. But the companies that wrote the loans didn't have to worry about poor quality, because they were just going to sell them off to someone else.
They sold them to companies that bundled the loans up into securities and in turn sold them to investors. And so none of the companies that were responsible for the loans had to hold on to any of the risk — they didn't have any skin in the game. So they didn't really care if people ultimately couldn't pay their mortgages.
Skin In The Game
This new rule, from the FDIC and five other agencies, aims to change that. It says, in short, if companies are going to bundle loans into securities, they need to hang on to some of the risk. And the only way to avoid that is to work exclusively with supersafe loans, known as qualified residential mortgages.
"The proposed QRM underwriting standards focus on borrowers' ability and capacity to pay by relying on verified and documented income," says the FDIC's Suzy Gardner.
Under the proposed rule, qualified residential mortgages will have very high standards. Among them: Borrowers would have to come up with a 20 percent down payment.
But regulators say they don't think the qualified residential mortgage should be the new national standard for mortgages.
"I think it's important for people to understand the QRM rule is going to be a small slice of the market," says FDIC Chairman Sheila Bair. "It doesn't mean that everybody is going to have to comply with these standards to get a mortgage going forward."
Many people in the mortgage industry say that may be what regulators want, but that's not what they're going to get.
Limited Options, Higher Costs?
"As it's currently proposed, it's very restrictive," says Steve O'Connor, senior vice president for public policy at the Mortgage Bankers Association. "I think it will limit credit options for borrowers and make products more expensive for a lot of borrowers."
In other words, companies that securitize loans aren't going to want to have skin in the game, so they're going to stick with these supersafe mortgages. And for borrowers who don't qualify, it's going to be harder and more expensive to get a loan.
This is all very discouraging for Sarah Schroeder, 29. She lives in Warren, Mich., with her husband and two young children.
"Our dream is to get into a home before our oldest child starts kindergarten," says Schroeder. "We want permanence. We want to be a part of a community."
For Some, 20 Percent Down Is Too Much
They've been saving for a down payment for years, but don't have nearly enough.
"That 20 percent down payment is this almost mystical object that I'm just not sure my family will be capable of saving," Schroeder says.
Consumer advocates say if the rule goes ahead as proposed, many low- and middle-income people like Schroeder won't be able to buy homes.
"Don't throw the baby out with the bath water by eliminating qualified responsible would-be homeowners simply because they don't have the wealth accumulation to be able to plop down substantial amounts of money to get into homeownership," says John Taylor, president of the National Community Reinvestment Coalition.
None of these changes will be immediate. The rule most likely won't be final until later this year. And even then, loans backed by the government aren't subject to the rule. At the moment, the government — through entities like Fannie Mae, Freddie Mac and the Federal Housing Administration — is behind 90 percent of the mortgage market.