Mortgages Without Risk, at Least for the Banks

There was no single cause of the financial crisis, but a chief one was surely the way mortgage loans were made by people who believed they had no reason to care if the loan was repaid.

That was why the Dodd-Frank financial overhaul law included risk retention â€" called “skin in the game” â€" as a major reform. For all but the safest loans, someone connected to the loan had to keep a stake in it. If such a loan went bad, then that lender would suffer along with those who bought securities containing it.

“To me,” said Barney Frank, the former chairman of the House Financial Services Committee and co-author of the law, “the single most important part of the bill was risk retention.”

But it now appears that section will be rendered moot as multiple regulators give in to pressure brought by an odd coalition to classify virtually every mortgage as exempt from the risk retention law.

That coalition includes large parts of the banking industry, which seems to have no desire to stand behind its loans, as well as consumer advocates and the housing industry. The latter groups say they are worried that poorer people will be unable to obtain loans if all loans cannot be securitized.

On the other side, asking regulators not to gut the law is an equally unusual, if smaller, coalition. It includes Mr. Frank; Sheila C. Bair, the former chairwoman of the Federal Deposit Insurance Corporation; and the American Enterprise Institute, a conservative research group that has rarely, if ever, found itself in agreement with Mr. Frank on a regulatory issue.

The Dodd-Frank law told regulators to effectively set up three categories of mortgages. At the top were “qualified residential mortgages,” called Q.R.M. Those were to be the only mortgages that did not require skin in the game if they were pooled and sliced up into securities.

Under that were “qualified mortgages,” called Q.M. The Consumer Financial Protection Bureau was to establish standards for those, which it has done. Those rules, to take effect Jan. 10, were supposed to protect consumers, not the financial system. The bottom category was to include mortgages that met neither of those standards. They would require risk retention, as did the Q.M. mortgages.

The rules on qualified mortgages are meant to assure that consumers can afford them, and the requirements are rather low. Lenders must go to the trouble of verifying a borrower’s income, and the total monthly debt obligation must be no more than 43 percent of pretax income. There are no requirements for down payments, or limits on how much is lent relative to the value of the property.

Before the lending excesses that led to the crash, Ms. Bair said in an interview this week, banks generally refused to make loans on which repayments would be more than 35 percent of income, and often had lower limits. “There is,” she said, “a lot of room under Q.M. to make mortgages that should not be made.”

That brings us to Q.R.M. â€" the qualified residential mortgage. The six regulators that are supposed to agree on rules for that put out a proposal in 2011 that gave in to the banks on many issues, but not all. The banks reacted with anger, and the latest proposal is a virtual complete surrender. It essentially says that any mortgage that meets qualified mortgage standards will meet the higher ones as well.

“The result,” Mr. Frank wrote in a comment letter, “would be two categories, those that fall below standards and probably shouldn’t be made, and those that could be made and would not be subject to risk retention.”

“I am not surprised,” Mr. Frank added, that “the overwhelming majority of commenters who are interested in building, selling or promoting the sale of housing to lower-income people support effectively abolishing risk retention. I should note that if all of these people were correct in their collective judgment, we would not have had the crisis that we had.”

Floyd Norris comments on finance and the economy at nytimes.com/economix.

A version of this article appears in print on November 29, 2013, on page B1 of the New York edition with the headline: Mortgages Without Risk, At Least For the Banks.