The U.S. Federal Reserve and other banking associations all around the world have been trying to formulate new rules for financial protection of both customers and banking institutions. Could these new rules affect the housing market? If so, how?
A Little History
The Fed along with other global banking associations held a meeting last Saturday in Washington, where they discussed new rules that could prevent banks from entering into swapping agreements unless there was a clause in the contract that ensured protection of the financial system in case of failure of delivery.
For instance, during the 2008 housing market crash - banks packed several faulty mortgages and sold them to investors as securities. When these securities soured in the investment market there was a dire lack of cash which ultimately led to the global economic meltdown.
Global banks are now putting their heads together to prevent such an incident again. The mortgage and securitization scenario in the country has become stricter. Lenders have become more cautious of who they approve loans to and even the slightest drop in credit scores is rendered risky.
Experts Speak
The Fed is poised to announce some new risk retention/qualified residential exemption rules in the coming months. The proposed rule includes retention of at least 5 percent of the risk when issuing mortgage-backed securities.
MarketWatch spoke to a few industry experts who weighed in on how the rules would impact the U.S. housing market.
While some say the risk retention rules could hurt the housing market and dampen its progress, others believe it will hardly have any effect on the real estate sector.
Most think that the risk retention rule will equal the qualified mortgage (QM) rule introduced by the Consumer Financial Protection Bureau that went into effect in January. The QM rule requires loans to be approved only if a borrower met the lending standards.
"We showed them was you didn't need to establish down payment barrier in QRM because QM already guaranteed no bad loans would be going into securitization," David Stevens, CEO of the Mortgage Bankers Association, told MarketWatch.
"To the degree QM is enforced and everyone is learning to function within it, I think it would have relatively minimal impact. We're still in an adjustment period where lenders are getting comfortable. We are still in a transition period," Joseph Pigg, senior counsel for the American Bankers Association, was quoted by the website.
Interest Rates
Meanwhile, interest rates have been touching record lows. Recently, the 30-year fixed mortgage rate dipped for the first time below 4 percent. Fed officials said a rate-rise was not expected anytime before mid-2015 as the global economy still showed signs of weakness.
Read more on that here.
