Homes For Sale

Outgoing FDIC Chair Shelia Blair doesn’t think a controversial new rule designed to limit risky mortgages will have much effect on what consumers pay for home loans, despite widespread industry claims to the contrary.

Blair said she expects a requirement that lenders keep a 5 percent interest in certain mortgages will likely increase the interest rates on those loans by 10 to 15 basis points compared to mortgages without the requirement. That difference – equal to an additional 0.10 to 0.15 percentage points – is far less than the 2-3 percentage points that some in the mortgage and housing industry have predicted.   Speaking in a wide-ranging discussion at a seminar hosted by the Council on Foreign Relations, Blair expressed strong support for the new rule, established under last year’s Dodd-Frank financial reform act, which establishes the 5 percent requirement, known as “skin in the game.”   The idea is that lenders will be more careful about who they lend to if they have to maintain a financial interest in the mortgages they originate, rather than just selling them off to investors as mortgage securities.   “I’m a regulator. I respect regulation and good, high-quality, vigorous regulation,” said Blair, who was appointed by former President Bush. “But there’s only so much regulations can accomplish, and financial incentives can be so much more powerful.”   She said that requiring lenders who are securitizing loans for sale to investors to maintain a partial interest in those loans can go a long way toward strengthening underwriting standards without regulators having to micromanage what those standards are.   Blair was critical of a provision in the Dodd-Frank Act that exempts certain high-quality mortgages from the 5 percent risk retention requirement. Federal regulators have proposed that such loans, known as qualified residential mortgages (QRMs) be defined as loans with at least 20 percent down.   “At the last minute some in the industry got this curium exception into the bill that basically tells the regulators to define what’s the gold standard in mortgages and these are just such great standards that … we’re just so sure against default that nobody would really need to retain any risk,” Blair said.   “If we could just get rid of it it’d be fine with me, just making sure everybody keeps 5 percent, I would love that,” she said.   Blair is due to end her term at the FDIC on July 8.

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