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Feds vote to exempt some mortgages from new rules

WASHINGTON — Federal regulators are proposing to exempt certain mortgages from new rules aimed at getting banks to take on more risk when they package and sell mortgage investments.

Critics say the proposal could hurt low- and moderate-income borrowers by limiting their access to mortgages.

The Federal Deposit Insurance Corp. and the Federal Reserve voted Tuesday to advance the proposal. It would define an exemption to rules required by the new financial regulatory law. Under those rules, banks must hold at least 5 percent of the mortgage securities on their books. But lawmakers left it to regulators to define that exemption.

Under the definition regulators have proposed, banks wouldn’t have to have so-called “skin in the game” for mortgage securities that contain loans for which buyers made at least a 20 percent down payment.

For banks to qualify for the exemption, they would also have to collect information from borrowers showing proof of income, credit history and ability to make payments.

The new rule is designed to deter the kind of loans that helped cause the 2008 financial crisis.

Ahead of the crisis, banks packaged and sold bundles of risky mortgages that offered teaser rates that increased after only a few years. Once the interest rates on the mortgages spiked, many borrowers ended up defaulting. As a result, the value of securities that contained those mortgages plummeted.

Experts say banks had very little of their own money invested in those mortgage securities, and that led them to take greater risks that contributed to the financial crisis.

The proposal has been awaited by Wall Street, which is looking to revive the market for mortgage securities. It has remained weak since the financial crisis, largely because investors are unsure about the quality of the loans. Other federal regulatory agencies are expected to back the proposal in the coming weeks. It could be adopted later this year.

FDIC Chairman Sheila Bair said the mortgages that qualify for exemption “will be a small slice” of the mortgage securities market overall.

Bair said many people have expressed concern that the requirements for exempting mortgages could reduce the availability of mortgages for low- and moderate-income borrowers.

“We take these concerns very seriously and want to make sure they are fully addressed,” she said before the vote.

The FDIC is seeking comments on the possible impact of the mortgage requirements on low- and moderate-income borrowers during the 60-day public comment period on the proposed rule.

The FDIC also voted to advance rules requiring financial institutions with $50 billion or more in assets to submit a plan detailing how they would wind down their operations if they experienced severe distress or failed. About 125 companies would be subject to the requirement.