Wednesday, June 25, 2014


The SEC recently redrew their objection to softening of new proposed mortgage regulations. Instead they reached a compromise to re-evaluate, and potentially adjust the rule, two years after the effective date and then every five years afterward.

The softening, at this point, includes elimination of the down payment and the requirement for lenders to retain 5% of a loan’s risk once it has been sold to investors. This is a dramatic change from the standards discussed as recently as 2011.

The impetus for these changes is to improve the housing markets which many in housing industry, as well as affordable housing groups and regulators believe is being hampered by the current down payment requirement.
Home buyers were not the only, or even primary, reason for the credit crisis. But they certainly contributed to the enormity of the situation via default on making their mortgage payment.

Is elimination of the down payment an appropriate response to a weak housing market? Will it weaken a home buyer’s commitment to pay the mortgage? Will defaults increase over time? At the same time is two years too long to judge the success or failure of this change? Perhaps we should track payment history to ensure that we avoid mini-crises.

This is another step in modifying the Dodd Frank Act (DFA) which is still evolving. At the same time Congress is still discussing the future role of FNMA and FHLMC. And now, we are considering eliminating a major part the mortgage qualification requirement?

Addressing the weaknesses in the housing market is critical to the financial recovery. But deciding which entity will guarantee repayment to investors, and how the guarantee will work is critical to investors as well.  

The bottom line is that investors provide the flow of capital to lenders to ensure that there are competitive mortgage to homebuyers. As such Mortgage Backed Securities (MBS) must provide a level of safety to investors so that they will remain attractive to investors. 

         Is this a positive change?

                 What other changes should be made at this time?

                             Or, should we be maintain the traditional 20% down payment?