Rules Will Require Mortgage Borrowers To Have More Skin In Game

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WASHINGTON – Financial regulators are expected to introduce rules as soon as this week that would require mortgage borrowers to have down payments of at least 20% in order to qualify for a federal guarantee, that is, have their loans sold to Fannie Mae or Freddie Mac.

The rules will establish standards for Qualified Residential Mortgages which would be exempt from new requirements under the Wall Street reform bill that loan originators retain at least 5% of risky loans – so-called skin in the game – they sell on the secondary market. The aim of the rules are to prevent a repeat of some of the havoc caused on the secondary market when lenders sold poor quality loans as part of securitizations with little or nor care of how the loans performed. The original lenders were therefore off the hook if the loans went bad.

The original legislation said loans backed by the Federal Housing Administration would not be subject to the risk-retention rules. The new proposal will go beyond that to exempt any loans guaranteed by the federal government, including those backed by mortgage financiers Fannie Mae and Freddie Mac, according to several sources.

Loans that meet the 20% down payment threshold would not be considered risky, so they would be exempt from the 5% skin in the game requirement.

The rules are being developed by the Securities and Exchange Commission, which has jurisdiction over the securitization markets, as well as the Treasury and Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac. CUNA officials said last week they have discussed their concerns with the SEC on how the rules may affect credit unions.


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