CDOs, MBSs, CMBS, CMOs

Repackaging Mortgages Would Require Large Down Payment Under New Rules

Posted on Monday, April 4, 2011

U.S. lenders would have to offer mortgages with at least a 20 percent down payment if they want to repackage the loan to sell to other investors without keeping some of the risk on their books, according to a proposal U.S. bank regulators endorsed on Tuesday.
The Federal Deposit Insurance Corp board agreed to seek public comment on the proposal that is intended to restore lending discipline and define the safest form of mortgages that can be sold to investors.
Last year's Dodd-Frank financial law 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 are exempt from the risk requirement.
Mortgages sold to Fannie Mae and Freddie Mac would also be able to escape the risk retention requirement, at least while the mortgage finance giants remain controlled by the government.
Small banks, consumer groups and some mortgage lenders have complained that a 20 percent down payment is too high and will make it difficult for many people to purchase a home, causing a further drag on the struggling U.S. housing market.
FDIC Chairman Sheila Bair said on Tuesday that she expects "qualified residential mortgages," those exempt from the risk retention requirement, will only be a "small slice of the market."
If true, banks would continue to offer a variety of loans with lower down payments, even if it meant keeping some of those riskier loans on their books.
The asset-backed securities market has struggled since the financial crisis and regulators have said they hope the rule will provide a level of certainty that will help it recover.
"If we are truly interested in restarting securitization, then we must restore investor confidence and the soundness of the securitization model," Bair said.
She said almost 90 percent of loans during 2005 and 2006 to borrowers with poor credit records, and loans with little documentation provided by the borrower, were privately securitized.
The Securities and Exchange Commission will consider the proposal on Wednesday and all the of the agencies involved have said they will vote on it this week. The FDIC, whose members include Office of the Comptroller of the Currency, agreed to put the plan out for public comment for 60 days.
(Reporting by Dave Clarke; Editing by Tim Dobbyn) REUTERS


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