Tags: Financial Overhaul

Regulators: Exempt Some Mortgages From Risk-Taking Rules

Tuesday, 29 Mar 2011 12:23 PM

Federal regulators are proposing to exempt certain mortgages from new rules aimed at getting banks to take on more risk when package and sell mortgage investments.

The Federal Deposit Insurance Corp. voted Tuesday to advance the exemption from rules required under the new financial regulatory law. Under the rules, banks must hold at least 5 percent of the mortgage securities on their books.

Banks would not have to have so-called "skin in the game" for mortgage securities that contain loans for which buyers made a 20 percent down payment.

For banks to qualify for the exemption, they would also have to collect information from the borrower showing proof of income, credit history and ability to make monthly payments.

The objective of the new rule is to limit banks' exposure to risk and avoid the kind of loans that brought on the 2008 financial crisis.

Ahead of the crisis, banks packaged and sold bundles of risky mortgages with teaser rates that increased after only a few years. Many borrowers ended up defaulting on the loans when the interest rates spiked. As a result, the value of the mortgage securities plummeted.

Experts say banks had very little of their own money invested in those mortgage securities, and that led them to take greater risks that contributed to the financial crisis.

The proposal by the FDIC, the Federal Reserve and other federal regulators has been awaited by Wall Street, which is looking to revive the market for securities backed by bundles of mortgages. It has remained weak since the financial crisis, largely because investors are unsure about the quality of the loans.

FDIC Chairman Sheila Bair said the mortgages that qualify for exemption "will be a small slice" of the mortgage securities market overall.

Bair said many people have expressed concern that the requirements for exempting mortgages could limit the access to mortgages of low- and moderate-income borrowers. "We take these concerns very seriously and want to make sure they are fully addressed," she said before the vote.

The FDIC is seeking comments on the possible impact of the mortgage requirements on low- and moderate-income borrowers during the 60-day public comment period on the proposed rule.

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