Delamaide: Reforms near to ease mortgage lending

WASHINGTON — New rules on mortgage lending are getting closer to completion, and that should make it easier for banks to expand access to credit and give a shot in the arm to a lagging housing industry.

Banks have overreacted to the lending excesses that led to the financial crisis, so that even people with relatively high credit scores have trouble getting loans.

Uncertainty about new regulations requiring institutions originating loans to keep some of the risk on their books when the loans are packaged into mortgage securities is exacerbating this reluctance to lend.

One of the causes of the crisis, most analysts agree, was that mortgage originators grew reckless in their lending because they were able to offload all the risk into these securities, where subprime loans were packaged together with higher-quality loans in a way that made it difficult for investors to see how much risk was involved.

As a result, the Dodd-Frank financial reform act mandated that those packaging loans into bonds must retain some of the risk, leaving the actual details to regulatory agencies to work out.

That was four years ago, and the agencies have taken their sweet time kicking this ball around while banks sat on their hands because they weren't sure what kind of liabilities they were going to have with new loans.

The latest version of the rules, proposed last summer, broadens the number of exemptions to the general requirement for those originating loans to keep 5% of the credit risk on their books. Mortgages guaranteed by federal agencies or meeting the standards of the new Consumer Financial Protection Bureau, for instance, will be exempt from this so-called risk-retention rule.

Removing the uncertainty about the actual requirements should encourage banks to resume making loans to genuinely creditworthy customers, or at least eliminate that as an excuse for not making loans.

This in turn will make it possible for the housing industry, which has lagged in the economic rebound, to break through to the next stage and provide further stimulus to the economy as a whole.

The slow progress in implementing the Dodd-Frank reforms results in part from the need to coordinate among several regulatory agencies regarding specific rules. Six agencies are involved in the risk-retention rule, for instance.

While regular meetings between the agencies in the newly created Financial Stability Oversight Council have helped to bridge the silos they operate in, the agencies remain independent and they have sometimes been slow to share responsibilities.

Treasury Secretary Jack Lew serves as chairman of the FSOC and can crack the whip on these agencies, as he did last year to get the Volcker Rule finalized, forcing banks to separate speculative trading activity from lending operations.

Lew is testifying this week before committees in the House and Senate regarding the FSOC annual report, which has set an agenda for the coming year that includes finishing work on some key rules.

In a background briefing earlier this week, a senior Treasury official highlighted the risk retention rule as one that could be particularly helpful given the importance the housing industry to the overall economy. (The official declined to be identified ahead of the secretary's testimony.)

In his written testimony for the House Financial Services Committee hearing on Tuesday, Lew emphasized the importance of housing finance reform in preserving financial stability and cited progress on risk-retention rules as a positive step.

The FSOC annual report, Lew said in his written statement, "outlines the ongoing need for market participants, regulators, and Congress to work together to create structural reforms that will help reduce uncertainty in the housing finance market, provide access for creditworthy borrowers, and protect taxpayers."

In his testimony, Lew highlighted the progress that has been made. In addition to finalizing the Volcker Rule, regulators have strengthened bank capital rules, imposed a supplementary leverage ratio for the largest banks, enhanced prudential standards for the U.S. operations of large foreign banks, and developed clearing, trading, and registration requirements for certain swaps markets.

As a result, he said, "today, our financial system is better capitalized, more transparent, and better prepared to withstand shocks."

Darrell Delamaide has reported on business and economics from New York, Paris, Berlin and Washington for Dow Jones news service, Barron's, Institutional Investor and Bloomberg News service, among others. He is the author of four books, including the financial thriller Gold.