Post-Meltdown Mortgage Rules for Bank to Ease

Regulators want to ease a rule that would require banks to share some risk in the complicated mortgage investments that helped cause the financial crisis.

Under the 505-page draft proposal advanced Wednesday by the Federal Deposit Insurance Corp. and the Federal Reserve, banks could exempt relatively safe mortgages from the value of those securities. The broader requirements would still have banks hold at least 5 percent of the securities on their books. It drops a requirement that lenders retain a stake in mortgages with down payments of less than 20 percent. But banks complained that would exclude too many buyers with solid finances.

The proposal would require banks to retain a stake of mortgages when borrowers are spending more than 43 percent of their monthly income to repay their debt, versus when the spending would be more than 36 percent of income on all loan payments. The new measure also would prohibit loans with risky features such as balloon payments or repayment terms of longer than 30 years.

The broadening of the exemption is the latest sign of banks’ influence over the rule-making process after a financial overhaul law passed in July 2010. In the years before the crisis, banks packaged and sold bundles of risky mortgages with low teaser rates that climbed after only a few years. Many borrowers ended up defaulting on the loans when interest rates spiked. As a result, the value of the mortgage securities plummeted. Experts say banks had very little of their own money invested in those securities. That led them to take greater risks that helped stoke the crisis.

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