FDIC asks: What is a ‘safe’ mortgage?

WASHINGTON – March 25, 2011 – Later this month, the Federal Deposit Insurance Corp. will consider new rules that define what a safe or “qualified” residential mortgage is as part of the Dodd-Frank financial overhaul law.

Experts say the classification will likely have broad sweeping effects on the mortgage market.

The Dodd-Frank financial overhaul law, which was passed last summer, contains a risk-retention requirement that requires issuers of securities backed by mortgages and other assets to maintain 5 percent of the risk of a loan, if it is packaged into a security and sold to investors, Dow Jones reports. The idea is that lenders would be more careful with making loans since they would face steeper losses if a loan went bad.

Six federal agencies are working to resolve numerous issues on the proposal but one of the most controversial issues yet to be resolved is which loans are exempt from the risk-retention requirement and would be considered safe or “qualified” mortgages.

Expecting some heated debate, regulators have suggested issuing two different plans for public comment: One plan would call for a minimum 20 percent downpayment, and another plan would recommend a 10 percent downpayment as well as mortgage insurance.

FDIC banking regulators have called for a minimum 20 percent downpayment requirement for new mortgages, but lawmakers and consumer advocates have argued that number is too high and could hamper an already sluggish housing market.

Loans guaranteed by Fannie Mae and Freddie Mac, which make up about 70 percent of the mortgage market, are expected to be exempt as long as they remain under government control. Government agencies such as the Federal Housing Administration (FHA) are already exempt.

Source: “FDIC to consider rules defining ‘safe’ mortgages,” Dow Jones Business News (March 22, 2011)

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