Dismal housing numbers lend urgency to new mortgage rules

WASHINGTON — U.S. home prices continue falling, new data showed Tuesday, giving urgency to important fixes taking shape this week aimed at fixing specific causes of the U.S. financial meltdown.

January home prices fell 1 percent from a month earlier and 3.1 percent from January 2010, as measured by the S&P/Case-Shiller index, a composite of sales prices in 20 major U.S. housing markets. National prices have slumped for six straight months and home prices are down 31.8 percent from their 2006 peak.

"The bottom line is we just have a boatload of loans sitting in foreclosure or close, and we have to work through those loans before we can find a bottom," said Mark Zandi, the chief economist for forecaster Moody's Analytics.

The dismal numbers reflect the deep damage done by a financial crisis that began with problems in mortgage finance. This week may prove a pivotal one for fixing some of what went wrong.

The Federal Deposit Insurance Corp. approved Tuesday a rule that would force Wall Street to retain an ownership share when issuing complex bundles of mortgages that poisoned the global financial system.

Lack of "skin in the game" allowed Wall Street firms to take millions of shoddy U.S. mortgages and profitably bundle them into complex bonds in a secondary market, where they were dumped on unsuspecting investors. The FDIC measure, backed by other regulators, is designed to restore investor trust in this secondary market, which is vital to mortgage lending.

Separately, the Federal Reserve imposes new rules on Friday that'll end the practice of allowing mortgage brokers to receive a bonus from lenders — a legalized kickback — when they get a borrower into a loan with a higher interest rate than the rate for which they qualified. During the housing boom, lenders rewarded brokers for getting borrowers into ill-suited and often predatory loans.

"I think the importance of what you're seeing as you group the pieces together is the remaking of the mortgage system after the crisis ... It is very, very important," said Barry Zigas, the director of housing policy for the Consumer Federation of America.

Last year's broad overhaul of financial regulation also created a new Bureau of Consumer Financial Protection, which opens for business on July 1, to better police mortgage lending.

Congressional Republicans are trying to defund and defang the new bureau, and Tuesday, they unveiled eight bills designed to put to death mortgage finance titans Fannie Mae and Freddie Mac. The two have been in government hands since September 2008.

The measures don't provide a timetable, but would progressively lower the limit of how many mortgage bonds the two could own over a five-year period, getting government almost completely out of mortgage finance.

"Today marks the start of a process," said Rep. Scott Garrett, R-N.J., the chairman of a subcommittee that deals with the agencies. "The culmination of our efforts will ... return our housing system to the private marketplace."

Fannie and Freddie buy loans from lenders and bundle them into bonds sold to investors, a process called securitization. Wall Street took much of their bonds during the housing boom, before weak lending standards brought down the entire system of mortgage finance. Today Fannie and Freddie do about 90 percent of the pooling of new mortgages.

The FDIC's proposed rule seeks to have Wall Street bundlers of complex bonds retain 5 percent of any loan that isn't considered a Qualified Residential Mortgage. The FDIC defined Qualified Residential Mortgage as a loan that has a 20 percent down payment from the borrower, whose credit history is free from late payments and whose monthly mortgage payment won't exceed 31 percent of pre-tax income. Government-backed loans and those placed with Fannie and Freddie also would be exempt.

Critics complain that this effectively would reward 1980s-type underwriting by lenders.

"That's back to what the underwriting guidelines were before the drive to make credit accessible for people of low income," Zigas said.

John Taylor, the president of the liberal National Community Reinvestment Coalition, charged in a statement that Congress and the Obama administration "would like to limit homeownership to the well-heeled." That's a reference to the administration's Feb. 11 White Paper, which called for down payments of at least 10 percent for government-backed mortgages, higher than the traditional 3 percent.

Wall Street warned that attempts to improve the quality of credit could limit its extension to borrowers.

"Such a step could further delay the housing-market recovery and have far-reaching negative implications to the public and investors, as well as for the broader economy," Richard Dorfman, a managing director of the Securities Industry and Financial Market Association, said in a statement.


FDIC Chair Bair statement

Treasury White Paper on Fannie-Freddie

GOP Fannie-Freddie proposals

Fed rule on kickbacks


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