Thursday, October 23, 2014
Relaxed Mortgage-Lending Rules
Three US agencies signed off on relaxed mortgage-lending rules, helping complete a long-stalled provision of the Dodd-Frank financial-overhaul law (WSJ).
The rules are intended to improve the quality of loans by giving banks a financial incentive to ensure mortgages can be repaid. The initial rules required that banks hold 5% of the risk of mortgages packaged and sold to investors or require a 20% borrower down payment. But regulators, concerned that overly stringent rules would harm the housing market’s recovery, backtracked on the 20% down payment (WSJ).
Two republicans SEC commissioners opposed the news rules, saying that relaxed lending laws such as these significantly contributed to the most recent financial crisis.
Do you think that banks should be required to take on some of the risk? Will this relaxation of lending laws lead to problems in the financial market? Or are there enough new regulations to prevent another crisis? Are these laws important because they extend credit to poor borrowers? Or are they just a way for banks to :again avoid having any skin in the game" (NYT)?
Read more in the Times and in the the Journal.
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It doesn't seem like 5% is much.. Do we know if that was set arbitrarily or not? Definitely making banks responsible for the health of the loans they make is important. Risky mortgage loans are undoubtedly what sent the U.S. economy to the tank in the 2008 financial crisis. I am curious if this does enough, however. It seems that the risk is disproportionately stacked on the individuals that are paying the mortgages, not the firms that are lending them out. Who is to blame, though? Is it the bank's fault for offering risky loans or is it the public's fault for taking them?
ReplyDeleteThe problem with relaxed mortgage-lending rules is exactly what the republican SEC commissioners stated; that relaxed mortgage-lending significantly contributed to our most recent financial crisis. With any investment comes risk, and since a bank loan is essentially a debt investment, they should absolutely take on some (most) of the risk. I agree with Bret regarding the acute 5% and it seems too low and fairly arbitrary. However, I believe that the bulk of responsibility lies in the banks when it comes to sub-prime mortgages, and not the public for accepting them. The banks handing out the money, and therefore making an investment should be the ones held accountable, not those that they are investing in.
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