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NM community bankers happy that feds relax proposed mortgage rule

salesNew Mexico’s community banks are celebrating a federal decision this week to soften a proposed rule that would require banks to keep a stake in home loans that they parcel out to investors. Regulators were worried that the policy would disrupt the nascent housing recovery.

“If in fact the regulation had gone through, it would have made it harder for a community bank to be able to make residential mortgage loans,” said Independent Community Bankers Association of New Mexico President Jerry Walker. “When ever you do anything that is going to restrict the availability of credit, that is going to cause the price to go up. It’s going to make it harder to qualify for a mortgage. It is going to make it more difficult for people to finance and buy a home.”

The modification of the rule “is huge for us,” Walker said.

Banks across the country have warned that a pile-on of new mortgage regulations would raise their costs and ultimately make it more difficult or expensive for consumers to get a loan.

In response, six agencies, including the Federal Reserve, have loosened the definition of the types of home loans – known as qualified residential mortgages or QRM – that are deemed secure enough to be exempt from the extra requirements.

Regulators initially defined qualified residential mortgages as those with at least a 20 percent down and no more than a 36 percent debt-to-income ratio. That 2011 proposal raised fears the definition was so strict that it would limit access to credit for low- and moderate-income Americans.

The new 505-page proposal has eliminated the down payment requirement and raised the debt-to-income ratio to 43 percent. On loans that do not meet that threshold, banks and bond issuers will have to keep a 5 percent interest in the mortgages as they get bundled into securities for investors.

That’s to make the banks retain some of the risk and prevent a repeat of the shoddy mortgage securities created during the financial crisis.

The revisions align the QRM rule with the existing qualified mortgage rule, a measure finalized in January by the Consumer Financial Protection Bureau that aims to determine whether a borrower can repay a home loan.

Mirroring the CFPB’s rule means that in order to qualify for the exemption, banks must adhere to restrictions that prohibit interest-only loans, balloon payments and other harmful mortgage features.

Lenders that issue loans using the government criteria would receive broad legal protections against borrower lawsuits. As a result, analysts expect banks primarily will churn out mortgages that adhere to the standards.

“The risk retention rule makes important strides in ensuring our mortgage markets can operate in a safe and sound manner while meeting the needs of creditworthy borrowers,” said Thomas Curry, comptroller of the currency, in a statement.

In the run-up to the meltdown, banks relaxed lending standards by failing to verify income, glazing over credit history or issuing mortgages with skyrocketing interest rates. They bundled these troubled loans into residential mortgage-backed securities that imploded once the market tanked.

The Dodd-Frank financial reform law called on regulators to eliminate the kind of shoddy underwriting that fueled the housing crisis and shift more responsibility onto banks that package loans.

David Stevens, president of the Mortgage Bankers Association, praised regulators for taking into consideration “that the (original) proposal would have unduly constrained the availability of mortgage credit for many borrowers.”

Regulators, he said, “recognized the implications for consumers and the broad mortgage markets, and decided to alter and then re-propose a much better rule.”

But the fight may not be over. The new proposal asks for comment on a much tougher alternative plan that would hike the down payment requirement up to 30 percent. It also would limit the qualified residential mortgage label to home loans with a maximum 70 percent loan-to-value ratio that adhere to key components of the CFPB rule.

“Although the mortgage industry won big with the QRM equals QM proposal, it will have to fight hard to keep it,” said Karen Shaw Petrou, managing partner of Federal Financial Analytics. “We anticipate the final rule will strike a middle path. This will be between the no-down-payment proposal and the 30 percent option, ending up at 10 percent.”

Journal Staff Writer Winthrop Quigley contributed to this report