WASHINGTON (AP) - 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. and the Federal Reserve voted Tuesday 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.