FDIC proposes exemption for mortgage securities

WASHINGTON – Federal regulators are proposing to exempt certain mortgages from new rules aimed at getting banks to take on more risk when package and sell mortgage investments.

The Federal Deposit Insurance Corp. on Tuesday and the Federal Reserve a day earlier voted to advance the exemption from rules required under the new financial regulatory law. Under the rules, banks must hold at least 5 percent of the mortgage securities on their books.

Banks would not have to have so-called "skin in the game" for mortgage securities that contain loans for which buyers made a 20 percent down payment.

For banks to qualify for the exemption, they would also have to collect information from the borrower showing proof of income, credit history and ability to make monthly payments.

The new rule is designed to limit banks' exposure to risk and deter the kind of loans that brought on the 2008 financial crisis.

Ahead of the crisis, banks packaged and sold bundles of risky mortgages with teaser rates that increased after only a few years. Many borrowers ended up defaulting on the loans when the interest rates spiked. As a result, the value of the mortgage securities plummeted.

Experts say banks had very little of their own money invested in those mortgage securities, and that led them to take greater risks that contributed to the financial crisis.

The proposal has been awaited by Wall Street, which is looking to revive the market for mortgage securities. It has remained weak since the financial crisis, largely because investors are unsure about the quality of the loans. Other federal regulatory agencies are expected to back the proposal in the coming weeks. It could be adopted later this year.

FDIC Chairman Sheila Bair said the mortgages that qualify for exemption "will be a small slice" of the mortgage securities market overall.

Bair said many people have expressed concern that the requirements for exempting mortgages could limit the access to mortgages of low- and moderate-income borrowers. "We take these concerns very seriously and want to make sure they are fully addressed," she said before the vote.

The FDIC is seeking comments on the possible impact of the mortgage requirements on low- and moderate-income borrowers during the 60-day public comment period on the proposed rule.

Loans backed by government-controlled mortgage giants Fannie Mae and Freddie Mac and by the Federal Housing Administration would be exempt from the risk-sharing requirement. The two companies and the federal agency together stood behind about 9 in 10 new mortgages over the past year, and own or back more than $5 trillion worth of home loans.

The FDIC also voted to advance rules requiring financial institutions with $50 billion or more in assets to submit a plan detailing how they would wind down their operations if they experienced severe distress or failed. About 125 companies would be subject to the requirement.

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AP Economics Writer Jeannine Aversa contributed to this report.