Government policies to promote home ownership should aim to decrease mortgage defaults, not increase them. They can do so by requiring the lender to bear some of the risk of loss, by requiring the borrower to make a substantial down payment, or both. Yet late last month federal regulators proposed rules that would gut both requirements.
Before the financial crisis, banks or brokers would often originate home mortgages and immediately sell them to a large financial institution, which would package them as mortgage-backed securities for investors. With “no skin in the game,” the originators had little incentive to determine whether the borrower was likely to default.
In response, the Dodd-Frank Act, passed in 2010, generally requires mortgage originators to retain 5% of the risk of loss on the mortgages they sell. However, exemptions built into the law—as interpreted by rules proposed on Aug. 28—would eliminate this requirement for most home mortgages. The proposed rules would also allow low down payments, although they are the best predictors of mortgage defaults.
Read the complete article at wsj.com
Have you heard of the two terms “risk retention” and “qualified residential mortgages”? Federal regulators are reportedly close to adopting rules defining these two terms, which will largely determine the future shape of the home mortgage market.
Here is the background. The Dodd-Frank Act tried to stop mortgage lenders from issuing mortgages and then immediately selling them to a large financial institution. That institution would put together a pool of home mortgages and sell securities based on the cash flows from the pool. Before the Dodd-Frank Act, because the issuers of many home mortgages immediately sold them, the issuers had little incentive to do a good job of checking carefully whether the borrowers would be able to pay off these mortgages. In other words, these issuers had “no skin in the game.”
In response, the Dodd-Frank Act generally required mortgage lenders to retain some risk in the mortgages they sold. In specific, these lenders were required to retain 5% of the economic risk if they sold mortgages that later defaulted. At the same time, Congress was concerned that such a requirement would lower the volume of new home mortgages. So, Dodd-Frank established several broad exemptions to the risk retention requirement for mortgages that Congress believed were relatively safe.
In the future, the home mortgage market will be dominated by mortgages covered by these exemptions. Almost every firm will prefer to originate and sell these exempt mortgages, rather than retain some of the risk that non-exempt mortgages will later default.
Read the rest of the article at Brookings.edu
A few weeks ago, I wrote about lowering the loan limits for mortgages insured by Fannie Mae and Freddie Mac. Congress, to their credit, wisely decided to restore the limits to their original, lower levels. Unfortunately, Congress decided to keep in the place the higher limits for mortgages insured by the Federal Housing Administration (FHA)—up to $729,900 in some areas.
In the past week, the news about Fannie Mae and Freddie Mac focused on the $13 million in bonuses paid to the top executives. But a much more significant story has received much less publicity: the bipartisan resistance to the lowering of the mortgage limits for Fannie and Freddie.
In October, President Obama unveiled part of his plan to try to help the ailing housing market. Specifically, he is expanding access and reducing barriers to his 2009 HARP program that allowed homeowners to refinance their mortgages at lower rates. However, takeup was minimal because underwater loans were not able to participate, and because upfront fees were high.
Can foreigners be lured by favorable VISA treatment into creating new jobs and bolstering home prices in the U.S.?
Yesterday’s Boston Globe had an interesting article about a program designed to increase business investment in the United States.
The immigrant investor program, created in 1990 by Congress to compete with a similar initiative in Canada, helps foreigners slash through the red tape in the US immigration system while allowing businesses … to raise the money they need to expand.
Funding a down payment with the credit increases the odds the buyer will default.
Back in February, the Obama Administration committed $75 billion to make mortgages more affordable to homeowners under financial pressure. Last week, however, the Congressional Oversight Panel for the financial bailout criticized the design of this mortgage modification program, and declared that “in the best case” it would prevent half as many foreclosures as the Administration predicted.
Pozen proposes a different kind of principal reduction program instead of the current mortgage modification program.