US to finalise mortgage market rules

US financial regulators are poised to finish long-delayed mortgage market standards as soon as next week, according to people familiar with the matter, adopting a relaxed set of rules designed to ensure credit is broadly available. 

The regulators, in a victory for real estate and mortgage industry groups, are expected to finalise a far looser set of standards for mortgages packaged into securities and sold to investors than initially proposed in 2011. 

Six regulators including the Federal Reserve, the Federal Deposit Insurance Corp and the Securities and Exchange Commission are expected to sign off on the rule as soon as next Wednesday. 

The long-expected move would wrap up a key unfinished piece of the 2010 Dodd-Frank financial law. Under Dodd-Frank, firms that issue mortgage-backed securities without government backing were required to retain a portion of the risk, under the theory that this "risk-retention" requirement would force them to pay attention to the quality of loans contained in securities. 

In spring 2011, regulators proposed that issuers of mortgage-backed securities would have to hold 5 per cent of a loan's risk -- unless borrowers brought at least a 20 per cent down payment. The idea behind the proposal was that banks would be less likely to engage in risky lending practices if they had some skin in the game. 

But after an uproar from real-estate agents, lenders and civil rights groups, banking regulators backed down and issued a new proposal last year. 

Under this revised approach, regulators would include a broad exemption for banks and other issuers of mortgage-backed securities from having to retain a portion of the credit risk on their books. 

No down payment would be required and loans sold to government-controlled mortgage finance companies Fannie Mae and Freddie Mac are expected to meet the risk-retention requirement. 

Still, some regulators were still skeptical as recently as this spring. In June, The Wall Street Journal reported that the SEC fought to include compromise language to address concerns that the rule may not go far enough to prevent the type of lax underwriting that helped fuel the 2008 financial crisis. 

The SEC won a concession in which US policy makers are expected to agree to re-evaluate, and potentially adjust, the rule two years after its effective date and every five years after that, the Journal reported at the time.