Small Mortgage Lenders Are Concerned About New Reform

financial reform touches mortgage loan lenders

US community bankers and lenders expressed the alarm to the lawmakers who proposed the federal rules which would cap the risk-taking on mortgage loan lending. They stated that the new guidelines could impair credit markets and hurt small banks.

The new rules are mandated by the passage of the Dodd-Frank Act, the Wall Street overhaul bill. They are under consideration now by the regulators and are aimed to establish guidelines for the securitized loans‘ originators. These cash advances are actually the types of the financial instruments blamed for fueling the financial crisis of 2007-2009.

The Risk-Taking Cap

Regulators have an intention to cap the risk-taking by means of making lenders hold at 5% stake in any debt instrument pooled in the secondary market.

An exemption was created by the law for the mortgages which are considered to be safe enough and the regulators were given the task to determine the suitable loans. As a result, regulators made a proposal as for the exemption for the so-called qualified residential mortgages – when borrowers provide 20% down payments.

Freddie And Fannie May Be Reformed

The enterprises sponsored by the government, including Freddie Mac and Fannie Mae, are actually critical to the housing market as they finance lenders and banks buying the mortgages. They either package them to investors for sale or keep them on their books.

The lawmakers of the Senate haven’t created any legislative approach to overhaul the system of housing financing. However, the House of Representatives has presented a number of bills aimed to dampen the role of the government in the mortgage system, including the legislation that would design private agencies to replace Freddie and Fannie.

Small US Mortgage Lenders Express Reform Concern

According to Reuters, a lot of small institutions are concerned that large banks would get an advantage over the smaller competitors, if Freddie and Fannie were eliminated. The lawmakers agreed that the small lenders shouldn’t be hurt by the new rules as they represent nearly 20% of the mortgage market and make advance loans for consumers underserved by major banks.