Mortgage rule could hurt borrowers: FHA's Ryan

By Corbett B. Daly

http://www.reuters.com/article/2011/04/13/us-usa-housing-mortgages-idUSTRE73C7NC20110413

WASHINGTON Wed Apr 13, 2011 5:46pm EDT

WASHINGTON (Reuters) - A proposed rule requiring a minimum 20 percent down payment on mortgages that lenders could then sell to investors without keeping some of the risk on their books might prevent some potential borrowers from getting a loan, a top U.S. housing official said.

While the rule "is designed to create a class of loans that have a lower likelihood of default, in its proposed definition it has the potential to exclude a number of buyers," Acting Federal Housing Administration Commissioner Bob Ryan said in prepared testimony.

Ryan is to deliver his remarks Thursday to a House Financial Services Subcommittee on Capital Markets, Insurance, and Government-Sponsored Enterprises. They were posted on the panel's website on Wednesday.

The Federal Deposit Insurance Corp and the Federal Reserve a few weeks ago endorsed the "qualified residential mortgage" proposal that is intended to restore lending discipline and define the safest form of mortgages that can be completely resold to other investors.

Loans backed by mortgage finance giants Fannie Mae and Freddie Mac and the Federal Housing Administration are exempt from the rule. Together they back almost nine in 10 new mortgages.

Last year's rewrite of the rules of Wall Street requires firms that package loans into securities -- a practice known as securitization -- to keep at least 5 percent of the credit risk on their books.

The provision is meant to force securitizers to have "skin in the game," so they don't churn out poorly underwritten loans and then pass along the risk to investors, as happened during the 2007-2009 financial crisis.

Mortgages that meet strict underwriting standards, known as qualified residential mortgages or QRMs, are exempt from the risk requirement.

"Given the exigencies of strong underwriting for healthy, sustainable mortgages, we must be mindful of the trade-off presented by the current definition of QRM between improvement in loan quality and affordability and accessibility for prospective homebuyers," said Ryan.

He said down payment requirements alone are not the best predictors of whether loans will perform. The combination of credit scores and down payments is a better predictor of loan performance, he said.

The agencies are currently accepting comments on the proposed rule. A final rule is expected later this year.