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Dodd-Frank: financial regulation in neutral

Qualifying residential mortgage standards
Qualifying residential mortgage standards

One problem at the root of the financial crisis was a breakdown in managing mortgage risk. Banks that wrote residential mortgages and then bundled and sold them to investors as mortgage-backed securities had little incentive to ensure those mortgages were sound.

To ensure that banks who write riskier mortgages share some of the risk if homeowners stop paying, Dodd-Frank requires the Federal Deposit Insurance Corp. to create a definition for a "qualified residential mortgage," incorporating minimum standards for a borrower's credit score, loan-to-value ratio, mortgage loan terms and other criteria. If a mortgage doesn't meet those criteria, the institution will have to keep a small portion of the home loan on its books.

"The purpose of the risk-retention rule, sometimes called the 'skin in the game' rule, is if you have to keep 5 percent of what you securitize, you'll be more diligent about making sure it's a good product," Benton says.

While that may be good in terms of preventing a future housing collapse, the FDIC's proposed financial regulation requiring a 20 percent down payment to be considered "qualifying" could make it harder for homebuyers who can't meet that standard to find a mortgage. If you fit that description, you still have some time to act before the rules go into effect.

"That rule making has begun, but it will be maybe a year from now before all that is fully implemented," Barr says.

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