Uncle Sam is trying to come up with new rules for the mortgage industry but those rules probably won’t be coming anytime soon because of political conflict. It is also hard to see exactly what effect those new rules will have upon refinancing.
A group of federal agencies has gotten together and proposed a new set of rules for the mortgage industry. The idea behind these rules is to set standards to avoid another mortgage industry collage like the one in 2006. The new rules would govern the way future mortgages are issued and probably wouldn’t affect refinancing.
Some Rules Could Affect Refinancing
The major provisions in the new rules appear to a requirement for a 20% down payment on most new residential mortgages and provisions that require mortgagers to a percentage of ownership in every mortgage that they issue.
The 20% down payment provision probably wouldn’t affect mortgage refinance but the provision requiring lenders to retain a stake in each mortgage they issue could. Persons seeking refinancing could probably meet the 20% down requirement by using equity in their homes.
The federal regulators want lenders to keep some ownership in each mortgage in order to prevent them from issuing questionable mortgages and passing the risk onto investors. Many observers believe the collapse of mortgaged backed securities caused the financial crisis in 2008. The lending and investment industries have voiced opposition to this rule because they think it would destroy the lucrative market for mortgage backed securities, Business Week reports.
Under the current system, lenders can sell the mortgages they issue to investment bankers that can convert them into mortgage backed securities. The proposed changes would require the lenders to keep 5% of each mortgage and let them sell the rest. The idea is that requiring them to keep a stake in the mortgage would discourage them from issuing risky loans.
This rule could affect refinancing because it could prevent lenders from packaging refinanced mortgages into securities and selling them. That could drive some lenders to stop refinancing mortgages and drive some lenders out of the mortgage business. This could reduce the amount of refinancing available and could potentially increase its cost.
Persons seeking refinancing right now shouldn’t be concerned about this because there is no indication when the new rules would go into effect. There is a strong possibility that political pressure from the financial industry which has many friends on Capitol Hill and close connections to the Obama White House could kill this measure.
Some observers including journalists at Business Week believe the provision requiring lenders to retain a percentage of ownership is a deal killer. If that is true it could sink the entire mortgage reform proposal and send regulators and legislators back to the drawing boards.
There is some leftwing opposition to the new mortgage rules as well. Fox Business News reports that some groups favoring widespread home ownership oppose the rules because they think the 20% down requirement will keep many lower income people from buying mortgages. The New York Times reports that the National Association of Homebuilders is also opposed to this rule because its members fear it would reduce their customer base.
The idea behind the 20% down requirement is make sure that people who take out mortgages have the money to pay them. One of the big criticisms of the lending industry is that it issued large numbers of mortgages to persons who were unable to pay them.
The agencies that proposed the new mortgage rules are the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve, the Securities & Exchange Commission (SEC), the Department of Housing & Urban Development (HUD), the Comptroller of the Currency (part of the Treasury Department) and the Federal Housing Finance Authority which oversees Freddie Mac and Fanny Mae.
Part of a Larger Debate
The fight over the new mortgage rules is part of a large debate in Washington over the future of American mortgages. The Obama Administration has announced that it would like to reform mortgages and get Uncle Sam out of the mortgage business.
Currently around 95% of American residential mortgages are backed by government in some way. The largest mortgage issuers are the federal mortgage firms Freddie Mac and Fannie Mae. These agencies were independently run but had to be taken over by the Treasury Department after the mortgage industry collapsed.
The Obama Administration hasn’t said how it would get the government out of the mortgage business. In practical terms it has tried to exert more government control over mortgage lenders through programs such as HAMP. This program which is still in effect; despite Congressional efforts to kill it, tries to get lenders to refinance the mortgages of homeowners who are underwater.
On the other side of the aisle many Republicans including most members of the Tea Party also favor getting the government out of the mortgage business. Unlike Obama they have made some efforts to achieve this goal, for example a purely symbolic effort to kill the HAMP program in March. The HAMP program is still effect and available for those want to refinance their homes.
It is doubtful that the government will be able to get out of the mortgage business anytime soon. Economist and investment banker Michael Pento estimates that 23% of all homeowners have no equity in their residences. This means that they are underwater or their homes are worth less than their mortgages.
There is little hope that private lenders will take over these mortgages so Uncle Sam will have to provide some sort of solution. The most likely scenario is the continuation of the HAMP program which has fallen short of its goals. This effort was supposed to help three to four million homeowners but has aided less than 600,000.
Most politicians are also afraid that any effort to limit mortgage availability and homeownership will be unpopular with voters. Homeownership is widely seen as part of the American Dream. Therefore expect more efforts to reform the process and increase regulation.
What Should You Do If You Need Refinancing
People who need their mortgages refinanced now should probably ignore the news reports about the new mortgage rules. Even if they go into effect they will mostly affect new mortgages and not existing ones.
Most homeowners should be able to find refinancing if they keep searching for it. To see if you qualify check your refinance options.
Now is a pretty good time to refinance because of lower interest rates. Persons who have equity in their homes should have a much easier time getting refinancing than those who are underwater. Even persons with homes underwater could be able to get refinancing through HAMP and other programs.