Regulators extend comment period on proposed mortgage-risk-retention rule

Growing opposition to a rule that would require lenders to assume some of the risk of loans packaged for the secondary market has caused regulators to extend the comment period about 60 days.

The Friday deadline was extended "to allow interested persons more time to analyze the issues and prepare their comments," the Federal Reserve announced this week.

The proposed rule, part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, generally would require sponsors of asset-backed securities to retain at least 5 percent of the credit risk of the assets underlying the securities. Sponsors would not be allowed to transfer or hedge that risk, according to federal regulators.

The proposal would define "qualified residential mortgages," a class of loans that would be exempt from the risk-retention requirement. Criteria for those loans would include borrowers' credit histories, payment terms, and loan-to-value ratios "designed to ensure they are of very high credit quality."

Housing and consumer groups, however, contend that the rule would require most buyers to put down a minimum of 20 percent to have their loans considered "qualified residential mortgages," eligible for the lowest competitive rates.

What that means, National Urban League president Marc Morial said, is that prospective borrowers would need to present 20 percent down payments, spend less than 28 percent of monthly gross income on housing, and have monthly household debt capped at less than 36 percent.

Data from the Mortgage Bankers Association, which also opposes this definition, show that to buy a house at the current median price of $208,000, a typical Philadelphia resident with the median annual household income of $36,669 would need to save 15 years to accumulate a 20 percent down payment, 71/2 years to put down 10 percent.

That assumes the borrower could save $234 a month, every month.

Since down payments and closing costs are cited by prospective first-time buyers as the toughest hurdles to overcome, housing and consumer groups say the "qualified residential mortgage" definition would shut millions out of homeownership.

About 62 percent of current first mortgages taken out to purchase homes would not have qualified under the proposed standard because they had down payments of less than 20 percent, according to LPS Applied Analytics, which tracks mortgage data.

John Taylor, of the National Community Reinvestment Coalition, said the proposal would create a separate and unequal system of finance for people of color and working-class people, regardless of creditworthiness.

Barry Rutenberg, first vice chairman of the National Association of Home Builders, said low-down-payment loans had been originated safely for decades and did not drive the current crisis.

"Subprime, no-doc, and other alternative mortgage products crashed our economy," Rutenberg said.