THE CLEAREST lesson of history, it has been said, is that people never learn the lessons of history. As if to prove that aphorism, federal regulators are relaxing rules governing the mortgage-backed securities business — less than a decade after an epic financial crisis, rooted partly in government indulgence of excessive risk-taking in the mortgage-backed securities business.
The 2010 Dodd-Frank financial reform bill insisted that private-sector issuers of mortgage-backed securities retain some risk associated with the underlying home loans. The sound idea behind this was that issuers would be more likely to underwrite loans properly if they had “skin in the game.” Initially, regulators proposed that issuers keep 5 percent of the risk unless the borrowers put at least 20 percent down. But the relevant agencies — the Federal Reserve, the Department of Housing and Urban Development and the Securities and Exchange Commission — have decided to water that down and accept ability-to-pay verification and a 43 percent debt-to-income ratio in lieu of the 20 percent down payment.
The “private label” securities industry is a shadow of its pre-crisis self — only 2 percent of the $1.5 trillion market — so the new rule’s impact is mainly symbolic, for now. Far more consequential was a similar announcement by Mel Watt, chief of the agency that controls Fannie Mae and Freddie Mac, the two government-backed entities that issue the vast majority of new mortgage-backed securities. Mr. Watt said that his agency will no longer hold mortgage lenders to the same strict accountability for flaws in the loans they sell to Fannie and Freddie that had prevailed since the crisis. Additionally, Fannie and Freddie will resume purchasing loans with down payments as low as 3 percent.
These steps are being taken in the name of expanding access to home loans for people who are shut out of the market despite low interest rates. Improving their access, in turn, is supposed to bolster economic growth. The same rationale was offered in the years leading up to the crisis. The same array of interest groups that supported the pre-crisis status quo — real estate agents, low-income housing advocates and mortgage bankers — have been clamoring for regulatory relief now.
Their clamor is not surprising. The recovery of the housing industry has been uneven, and a lack of predictable rules has been part of the problem. In that sense, any new regulations are an improvement over no new regulations.
The problem is that Fannie and Freddie remain completely under government control, so that taxpayers will be on the hook for any incremental risk-taking. Instead of paving the way for a new, post-Fannie housing market, one with less taxpayer exposure, government is moving in the opposite direction. And by deepening the industry’s dependence on taxpayer backing in the short run, the new rules make it that much harder to reform the system in the long run.