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Risk-retention rule seeks to keep mortgage lenders responsible

by Adam Russett on March 8, 2011

New federal legislation may require mortgage lenders to retain a stake in housing loans, in an effort to prevent a repeat of the mortgage crisis, according to the Washington Post.

In the years leading up to the housing crisis, mortgage lenders were free to sell subprime loans which were later sold by banks as mortgage-backed securities, for which the original mortgage lenders were not held responsible.

The new rules would require lenders to undertake something called "risk-retention," in which they have to keep at least a 5 percent stake in risky loans.

Federal regulators are now in the midst of determining what kind of loan would be considered "risky."

A likely option would be to exempt loans made with at least a 10 percent or 20 percent down-payment from the "risk-retention" requirement. The latter and higher of the two requirements is supported by the Federal Reserve and the Federal Deposit Insurance Corporation, according to the news source.

Loans guaranteed by Fannie Mae or Freddie Mac may also be exempt.

"Fannie and Freddie will not be mentioned specifically in the proposal, but having the government guarantee the loan can be constituted as satisfying risk retention," said one source to the Washington Post.

U.S. Treasury Secretary, Timothy Geithner, recently urged Congress to not act too swiftly in housing market changes, for fear of disruption to overall economic recovery, according to MarketWatch.

Requirements for higher mortgage down-payments, especially for first time home buyers, could significantly lower home sales.

“Housing is a critical part of our economy and we will proceed with our plan for reform with great care,” said Geithner.

First-time home buyer sales are already down from 40 percent to 29 percent, according to a separate report from MarketWatch

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