Proposed FDIC Rule Could Reduce Number of Questionable Loans
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
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.