Mortgage Rule Could Dull Housing Market

NEW YORK (TheStreet) -- Access to mortgage loans may be severely restricted if a new rule proposed by U.S. regulators isn't amended, say mortgage industry executives.

"If this proposal goes through, the way it's written, I think the housing market will not recover for years to come," says Joe Murin, chairman of consulting firm The Collingwood Group and a former president of Ginnie Mae appointed by George W. Bush.

The 233 page rule, proposed Tuesday by six regulators including the Federal Reserve and the U.S. Treasury Department, will play an important role in determining how much risk banks have to retain from mortgages they originate or package into bonds known as mortgage backed securities (MBS) and then subsequently sell into the market.

While the debate can get highly technical, the issue is critical, as the boom and bust in MBS stands at the very center of the housing crisis.

Murin's main objection to the proposed rule is that it would require a 20% down payment on what will be termed a "qualifying residential mortgage (QRM).

While the QRM designation matters very little at the moment, it will become very important as the Federal government seeks to reduce the role of Freddie Mac(FMCC.OB), Fannie Mae(FNMA.OB)and the Federal Housing Authority, which are currently thought to stand behind more than 95% of new home loans made in the wake of the crisis.

As the role of those government and quasi-government entities is gradually reduced, QRMs are expected to become the only available option for many people with limited access to credit. Requiring a 20% down payment for QRMs "looks like it will exclude a lot of lower- to middle-income borrowers," says Patrick Dolan, a partner at corporate law firm Dechert who advises many big mortgage industry firms. He believes that requirement may be lowered after the 60-day comment period.

Wall Street lobbying group SIFMA appears to have similar concerns that the QRM definition is so narrow that it could hurt access to credit and stall the recovery.

Like influential members JPMorgan Chase(JPM), Bank of America(BAC) and Goldman Sachs(GS), SIFMA has not taken a clear stand on how a QRM should be defined.