The Federal Government, in response to the mortgage crisis, is making changes to their rules that require banks that initiate loans have to hold onto portions of those loans. Part of the reason that the mortgage crisis occurred was that lenders would initiate the loans and then sell off those loans to them to companies that bundled the loans up into securities and in turn sold them to investors. With the sale of the loan, the initiating bank made a small profit and sold off all of the risk.
Minimizing Risk To The Lenders
The only way for lenders and banks to minimize their risk exposure is to only initiate qualified residential mortgages (QRM). Under the proposed rule, qualified residential mortgages will have very high standards. Among them: Borrowers would have to come up with a 20 percent down payment. But regulators say they don’t think the qualified residential mortgage should be the new national standard for mortgages.
How The Changes Impact Cincinnati Mortgages
At this point it is unclear how this is going to impact the local mortgage market. If these changes go into effect it is clear that the lenders will be more interested in acquiring QRMs, and that may translate into higher rates for non qualified mortgages. Steve O’Connor, a senior vice president for public policy at the Mortgage Bankers Association says “I think it will limit credit options for borrowers and make products more expensive for a lot of borrowers.”
Minimal Impact In The Short Term
The rules will not take effect and be enacted until later this year. Moreover, the loans that are backed by the government aren’t subject to the rule. Currently Fannie Mae, Freddie Mac and the Federal Housing Administration back approximately 90 percent of the mortgage market. For more information see the extended article on NPR.