The Federal Deposit Insurance Corporation (FDIC) is proposing a new rule to help keep the types of loans that led to the 2008 financial crisis in check. The new rule seeks to make sure that those that make the loan share in the risk, rather than just passing the risk on to investors.
Part of what led to the financial collapse was the making of questionable loans, which were then bundled and sold. By knowing that these mortgages would be sold without risk to them, lenders had no incentive to ensure that the loans were of good quality or that borrowers could even afford the loans. Many of the loans that were made, according to the Associated Press, had low teaser rates that increased drastically after a short time; increasing to a point that caused many borrowers to default, which then caused the value of the securities to fall.
The new rule is aimed at stopping these questionable mortgages by ensuring that lenders have "skin in the game." The FDIC is proposing that lenders, who are still allowed to bundle loans and sell them as securities, must keep five percent of the mortgage securities, assuming some of the risk themselves.
Exception to the Rule
There is an exception to the proposed rule, however. If lenders wish to not keep any of the risk, they can bundle and sell qualified residential mortgages (QRM). QRMs, however, have very high standards, requiring borrowers to make a minimum down payment of at least 20 percent.
- Further, the AP notes that to qualify for the exemption, lenders need to collect certain information from borrowers, including:
- Credit history;
- Proof of income; and
- Ability to make payments.
While it seems that the reforms proposed by the FDIC would be popular in light of the last few years, not everyone is excited about the proposed rule. Steve O'Connor of the Mortgage Bankers Association told the AP that the new rule would "make products more expensive for a lot of borrowers." The AP further reports that consumer advocates worry that many low- or middle-income families will not be able to get home loans.
If you have been affected by a defective mortgage, contact an experienced foreclosure and mortgage lawyer today.