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

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