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More than three years after the Dodd-Frank financial reform was passed, much work remains to be done to carry out the law’s mandates. Some estimate that only a little over a third of Dodd-Frank’s provisions have been implemented to date. The delays have been attributed to a number of factors, including political pressures and the complexity of financial reform.

There has been some progress recently, however, and bank regulators and Congress intend to tackle some major issues shortly, including restructuring of government-sponsored mortgage entities Fannie Mae and Freddie Mac. But some of the measures generated by recent financial reform efforts appear to be somewhat watered down compared with Dodd-Frank’s original intent. New rules regarding mortgage securitization and qualified mortgages are one example.

The housing downturn and mortgage lending abuses were major contributors to the 2008 financial crisis. Banks made risky mortgage loans, bundled them into securities, and sold the mortgage-backed securities to investors, who often were unaware of the underlying mortgages’ riskiness until homeowners began to default on payments.

Dodd-Frank sought to address this problem by requiring securitizers to retain 5% of the credit risk of the assets backing the securities they sell. The idea is that banks would be reluctant to make risky mortgage loans and sell securities backed by these risky mortgages to investors if they had “some skin in the game”.

But the 5% retention requirement exempted ultra-safe mortgages, called “qualified residential mortgages”.  An early proposal by regulators would have limited the qualified mortgage designation to situations in which the homebuyer made a 20% downpayment, limiting the loan-to-home price ratio to 80%. Many complained, however, that the requirement would put homeownership out of the reach of the non-affluent.

After much debate, a recent proposal, aligned with one put forth by the Consumer Financial Protection Bureau, eliminates the downpayment requirement, allowing more mortgage loans, perhaps the majority, to be considered qualified mortgages.  The idea is to provide access to mortgage loans to a wider range of homebuyers, not just to the relatively well off.

To be sure, the extremely risky types of mortgage loans offered just prior to the recession are no longer being made. But some argue that an easing of the downpayment requirement might increase the risk that some of those loans would eventually default, and result in losses for holders of mortgage securities. There’s still a chance that the final version of securitization reform law will limit the qualified mortgage designation to mortgages where the borrower makes some downpayment, but perhaps not as high as 20%.

Another problem is that, by complying with the rules for making qualified mortgage loans (which includes checking the borrower’s ability to repay and that he meets a 43% debt-to-income ratio), banks are supposed to be protected from lawsuits filed by borrowers who default. But a September 6th article by Rachel Witkowski in the The American Banker indicates that some lawyers believe that banks could still be exposed to such lawsuits. It may be hard for banks to be certain that a given loan satisfies complicated qualified mortgage requirements. The qualified mortgage standards probably need to be further clarified, but we think disgruntled borrowers are always likely to seek legal recourse, whether they succeed or not. In all, the rules concerning mortgage-backed securities and qualified mortgages are probably still subject to change.

If all of the provisions of Dodd-Frank are this difficult to implement, it’s no wonder why it’s taking so long for financial sector reform to take effect. Still, Congress and bank regulators appear determined to make some progress along these lines in the year ahead. Housing finance reform is likely to be at the top of their lists.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.