Federal regulators retreated from a proposal that would have toughened rules for the mortgage securities market, a defeat for advocates of tighter standards and a victory for the housing lobby.
Six regulators—including the Federal Reserve, Federal Deposit Insurance Corp. and Securities and Exchange Commission—on Wednesday issued new proposed rules that would require banks and other issuers of mortgage-backed securities to retain 5% of the credit risk of the bonds on their books, as mandated by the 2010 Dodd-Frank financial-overhaul law.
However, the proposal carries an exemption so broad it wouldn’t apply to securities containing most mortgages made under today’s stricter lending standards, which are of relatively low risk. Rather, the rule would apply to the types of higher-risk loans that were popular before the 2008 financial crisis. The rule effectively sets boundaries for what kind of loans might be offered, and on what terms, once lending standards relax.
Had the rule been in effect last year, at least 98% of loans would have been covered by the exemption, according to Mark Zandi, chief economist at Moody’s Analytics.
The decision by regulators represented a major concession to the real-estate industry and consumer groups that had worried the 5% requirement would hurt the housing recovery by limiting credit.