8% Reserve Rule Looms for 80-10-10 Loans

An interagency rule that could discourage use of an innovative alternative to mortgage insurance appears headed for adoption.

The rule would require banks and thrifts to hold 8% capital reserves against the total loan amount of so-called 80-10-10 residential mortgages. In an 80-10-10 mortgage, the borrower puts 10% down, gets a first mortgage for 80% of the purchase price and a second mortgage for the remaining 10%.

The Federal Deposit Insurance Corp. approved the rule unanimously on Dec. 18, becoming the third agency to do so, after the Federal Reserve Board and the Office of Thrift Supervision. If the Office of the Comptroller of the Currency adopts the rule by March 1, as expected, it would take effect April 1.

The rule would have its biggest impact on national banks, which now hold significantly less capital on these loans than do thrifts or state banks.

As proposed in November 1997, the rule would have cut capital requirements on 80-10-10 loans for thrifts and state banks by letting them use the same formula as national banks. Mortgage insurers and others, however, were able to persuade regulators that 80-10-10 loans are risky and deserve a higher capital requirement.

Regulators have yet to draft a final version of a companion proposal that would further discourage 80-10-10 lending. Under the proposal, banks that sell the 80% first mortgage of an 80-10-10 loan package and hold the 10% second lien might have to set aside substantially more capital than they do currently.