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Housing reform efforts get even more confusing

By: 9 April 2011 One Comment

Get ready – this year will prove to be an interesting one for people who are wondering what, exactly, mortgage reform will look like.

Yes, we all know mortgage reform is coming. That was a foregone conclusion when the subprime mortgage industry tanked a few years ago and high foreclosure rates started to plague housing markets around the nation.

People started to question the underwriting standards that allegedly gave rise to so many mortgages that went so wrong and people started to wonder what could be done to prevent the issuance of loans that appeared destined to fail. The conclusion under which the federal government appears to be operating these days is that lending standards need to be revamped in order to prevent a bunch of shaky loans and foreclosures in the future.

The government, however, is sending more than a few mixed signals when it comes to what mortgage reform should looks like. Consider this. The Barack Obama Administration, in February, floated out the idea of eliminating Fannie Mae and Freddie Mac – the two government sponsored enterprises that control over half of the nation’s $11 billion mortgage market – and replacing them with a system backed by private capital.

By the end of March, however, the Federal Deposit Insurance Corp. (FDIC) and Federal Reserve started seeking public comment on a rule that could effectively increase reliance on the federal government in the mortgage industry. How? The proposed rule would require lenders and bond issuers to hold a stake in loans they securitize. A securitized mortgage, simply put, is one that is put into a trust and used to back securities.

Under the rule, lenders and bond holders would have to keep 5 percent of the value of those securitized mortgages if a borrower had less than perfect credit or paid less than 20 percent of the value of a home as a down payment when taking out a mortgage. The reasoning behind that requirement is easy enough to understand – investors and lenders that have a vested interest in the success or failure of a mortgage will be more selective when underwriting those loans.

There is an exception to that proposed risk-retention rule – lenders could avoid keeping a share in riskier mortgages by getting them insured by federal agencies or (you guessed it) Fannie Mae or Freddie Mac. In other words, the Obama administration is considering reducing federal involvement in the mortgage industry while the Fed and FDIC are considering a rule that appears to encourage more federal government involvement in the mortgage industry.

That’s not necessarily the case, however. Apparently, the exemptions were contemplated by the FDIC and the Fed in part to deal with a temporary situation – Fannie Mae and Freddie Mac are in conservatorship, so what loans under the rule will or will not be exempt should those two entities be eliminated?

That’s a question that’s tough to answer right now, but it makes sense that it will be taken up should Fannie Mae and Freddie Mac be eliminated. In other words, a lot of loans will be exempt should the rule pass while two GSEs are in conservatorship and the question of exemptions may be taken up should Fannie Mae and Freddie Mac be eliminated or reduced in size.

The problem with the mortgage reform debate is that it’s becoming so complex and so many proposals are coming out regularly that keeping up with it all can be difficult. Fortunately, you can typically keep up with that debate by following the national Mortgage Bankers Association’s home on the Internet at

Home Sweet Home is written by Ethan C. Nobles and is distributed weekly to publications throughout the Natural State on behalf of the Mortgage Bankers Association of Arkansas.

About: Ethan C. Nobles:
Benton resident. Rogue journalist. Recovering attorney. Email =

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