June 16th, 2011
Econintersect: New requirements for mortgages have been published in a Bloomberg article in the Washington Post. The essence of a new federal proposal would limit the amount of debt that mortgagors could assume when buying a home. The objective is to reduce the risk of future foreclosure crises by asuring that future MBS (mortgage backed securities) are built with high quality mortgages. The proposal has been criticized as being damaging to the housing and mortgage financing markets. Follow up:
Follow up:From the Washington Post:
The proposal not only affects borrowers whose total debt — including credit cards, automobile loans and student loans — is more than 36 percent of gross monthly income. It also would affect borrowers whose mortgage payment alone is more than 28 percent of their gross monthly income.
Nearly three out of every five U.S. borrowers who bought homes last year would not have met the proposed restriction on total debt, according to an analysis by mortgage research firm CoreLogic.
Also from WaPo:
The debt restrictions are on top of other conditions, including a requirement that borrowers pony up a 20 percent down payment to qualify for the cheapest mortgages.
Mother Jones called the reports in the WaPo to be "Wall Street manufactured outrage." From the Mother Jones article:
... if mortgage loans are bundled up into securities and resold, they want the issuer of the security to retain 5 percent of the total offering. That's part of Dodd-Frank, and it's designed to give issuers an incentive to make sure their mortgage securities aren't full of toxic waste. If they have to keep a piece of the action on their own books, they'll want to make sure their securities are safe and sound.
However, there's an exception: If your mortgages all conform to the new rules, you don't have to retain that 5 percent chunk. That's all that's happening. You can make any kind of loan you want, but if it's anything other than super safe, you have to keep a piece of it on your books.
In other words, the proposals are directed at preventing future pump and dump operations by mortgage originators.
What would the impact of the proposed regulations be on the mortage market? Mother Jones attempted to address that:
Being forced to keep a 5 percent stake probably will have an impact on ABS issuers—that's the whole intent, after all—but the financial impact is almost certainly pretty minuscule. Tom Lawler at Calculated Risk roughly estimates it at perhaps 20 basis points at most on a nonconforming loan. In other words, the rate on nonconforming mortgages might go up 0.2 percentage points. At most. Something on the order of 0.1 percentage points or less is probably closer to reality.