Long awaited FDIC “skin-in-the-game” mortgage rules are out. Amusingly, banks are largely exempt from the new rules. On one hand it’s hard to make this stuff up, on the other hand it seems laughably easy to believe. My ears say the proposal sounds like it came straight from “The Onion”.

Please consider FDIC’s plan for ‘skin-in-the-game’ loans

Federal regulators drafting tighter underwriting standards for mortgages are planning to exempt banks from a key rule if they sell loans to two seized mortgage-buying giants.

The long-awaited proposal is due to be publicly released by the Federal Deposit Insurance Corp. Tuesday, and the proposal was obtained ahead of that by MarketWatch. At issue is a provision in the Dodd-Frank Act that requires banks to have “skin in the game” — namely, by retaining 5% of the risk of loans they package and sell.

The goal is to eliminate what had been a problem underlying the financial crisis, where lenders packaged and sold subprime mortgages of dubious quality. But lawmakers who drafted the legislation also included a measure that would exempt certain high-standard mortgages from the risk-retention rule if their loans met certain high underwriting standards.

According to the proposal obtained by MarketWatch, loans sold to mortgage-refinance giants Fannie Mae and Freddie Mac would carry no risk-retention requirement as long as the mortgage giants remained in government conservatorship. Fannie and Freddie were both taken under conservatorship in September 2008, at the height of the financial crisis.

These loans wouldn’t have to meet new strict underwriting standards for exemption set out in the proposal, but they must already meet underwriting standards that Fannie and Freddie generally require. Roughly 90% of all new loans today are sold to Fannie and Freddie.

“New Rule” Math

90% of loans are sold to Fannie and Freddie . Thus, 90% of loans will be exempt from the new rule.

90% seems like a high number and it is. However, why would banks accept any “skin-in-the-game” risk, when they can easily dump all the risk onto taxpayers via Fannie and Freddie?

Clearly, the effect of the new rule and its exemption will put upward pressure on the already astronomical percentage of loans going to Fannie and Freddie.

If the intent of this regulation is to get someone other Fannie and Freddie back in the mortgage business it will fail. If the intent of the regulation is to force more risk on banks, that will fail too.

If you are unemployed, look on the bright side. The FDIC will no doubt need to hire a few extra “regulators” to enforce this “brilliant” piece of regulation.

Mike “Mish” Shedlock
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