U.S. securities regulators approved a long-delayed mortgage rule Wednesday that is aimed at preventing a repeat of the housing crisis, where defective loans were being bundled into securities and sold to investors unaware of the risks, but one of the six regulators required to adopt the final rule is divided.
The Security Exchange Commission (SEC) approved the rule by a 3-2 vote, and the two opposing Republican commissioners said they believe its exemption for low-risk mortgages is too broad and does not sufficiently crack down on lax underwriting standards. The two offered some colorful criticism to their colleagues.
"Regulators working to adopt a final version of a proposed Henhouse Protection Rule should not abandon their independent judgment by capitulating to the views imposed upon them by a barrage of letters sent in by the Feed the Foxes Foundation and their allies," Republican SEC Commissioner Daniel Gallagher said in his .
The risk retention rule requires banks to retain at least 5% of the risk on their books when they bundle loans, securitize them and sell them to investors. It also includes an exemption for Qualified Mortgages (QM) similar to when the rule was proposed last year. Additionally, the final regulation does not require steep down payment standards that were a part of the initial draft, which would have required borrowers to put up as much as 20% of the price of their home to qualify.
Gallagher, along with SEC Commissioner Michael Piwowar, said the rule bolsters the dominant role of government-sponsored enterprises (GSEs) like Fannie Mae and Freddie Mac in the single-family residential market.
Gallagher and Piwowar’s dissent from the vote was expected after they published a in June. In the letter, they said they were disappointed with the SEC’s decision to surrender the definition of “qualified residential mortgage” to the Consumer Financial Protection Bureau.
"Today could have been the day when the commission and its regulatory partners ... stood strong, resisted political and special interest group pressure and courageously seized this golden opportunity to address the failed federal housing policy that was one of the central causes of the financial crisis," Gallagher said.
Piwowar said in his, that he remains concerned about the continued dominant role GSEs play in the housing finance industry, in particular Fannie Mae and Freddie Mac’s plan to offer 97% LTV financing.
“I am also troubled by last week’s news – the timing of which was undoubtedly coordinated with this week’s rulemaking – that the Federal Housing Finance Agency is pushing Fannie Mae and Freddie Mac to consider programs that would make it easier for borrowers to obtain mortgage loans with down payments as low as 3%,” he said. “ As prominent housing market scholar remarked, '3% [down payments] can disappear and become zero real quick…This is the sort of thing that gets people underwater.”
SEC Commissioner Luis Aguilar, a Democrat who voted in favor of the rule, also has some concerns with the broad scope of the exemption. However, he said the rule includes a safeguard that allows regulators to periodically review how it defines a QM mortgage and has asked the SEC staff to provide annual updates.