Divided SEC Adopts Mortgage Rule, Decries Lax Lending

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Andrew Harrer/Bloomberg via Getty ImagesSEC Commissioner Daniel Gallagher, a Republican, voted against the new mortgage rule, an expected move.
By Sarah N. Lynch

WASHINGTON -- U.S. securities regulators adopted a rule Wednesday designed to avert another financial crisis, but two officials dissented, saying it didn't do enough to discourage banks from lending to borrowers with shaky credit and then passing the mortgage risk to investors.

The Securities and Exchange Commission approved the so-called "risk retention" rule by a 3-2 vote, while the U.S. Federal Reserve is expected to approve it later Wednesday.

The rule requires banks to keep at least 5 percent of the risk on their books when they securitize loans. This "skin in the game" is aimed at aligning the bank's interest with investors that buy the loans.

But two Republican commissioners said they couldn't support the rule in part because they believe its exemption for low-risk mortgages is too broad and doesn't sufficiently crack down on lax underwriting standards. They also said the rule perpetuates the dominant role of government-sponsored enterprises such as Fannie Mae in the housing market.

"Today could have been the day when the commission and its regulatory partners ... stood strong, resisted political and special interest group pressure, and courageously seized this golden opportunity to address the failed federal housing policy that was one of the central causes of the financial crisis," said Republican SEC Commissioner Daniel Gallagher.

Before the financial crisis, banks pumped up lending volumes, little concerned about the risks since they planned to unload the loans. The system imploded when subprime mortgage borrowers started defaulting.

The dissents by Gallagher and Michael Piwowar were widely expected, after they published a letter to the editor in The Wall Street Journal in June.

Other banking and housing regulators gave their nod Tuesday. The agencies are required by the 2010 Dodd-Frank Wall Street financial reform law to implement the rule.

Their concerns, however, reflect the broader public debate about the delicate balance between mortgage lending standards and the need to protect investors.

The most hotly contested issue centers on the scope of an exemption for ordinary "qualified" residential mortgages. In 2011, regulators originally proposed defining qualified mortgages as those requiring borrowers to make hefty down payments.

Regulators scrapped the plan after the industry pushed back, saying it would stifle the housing market for lower-income buyers.

In Wednesday's final rule, the definition of a qualified mortgage is much looser than first proposed in 2011, and aligns with a definition in a separate rule by the Consumer Financial Protection Bureau.

In a study, SEC economists said the exemption is now so broad that the "same economic incentives" for the banks that existed prior to the financial crisis "may persist."

SEC Commissioner Luis Aguilar, a Democrat who voted in favor of the rule, acknowledged some outstanding concerns with the scope of the exemption.

But, he said, the rule contains a safeguard that allows regulators to periodically review how it defines a qualified residential mortgage, and has asked SEC staff to provide annual updates.

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Divided SEC Adopts Mortgage Rule, Decries Lax Lending

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Cost to renovate: $2,637-$3,077 for an 80-square-foot space (replacing existing cabinetry, countertops, sink and flooring, painting the walls, and updating the plumbing and lighting fixtures)

Fifty-seven percent of home buyers say they wouldn't buy a home without a laundry area. "Having a separate room [to use for things such as folding or ironing clothes] helps to keep the mess out of your living space," says Paul Sullivan, a Newton, Massachusetts, remodeler and custom builder. "Potential buyers will see it as a huge benefit." The laundry room in this Charlotte, North Carolina, home has a space large enough for a full-size washer and dryer, storage space for folded clothes and laundry supplies, additional electrical outlets and a sink.

Buyers who want this feature: 90 percent

Cost to buy and install: $150 to $250 per fixture

Exterior lighting is the most-wanted outdoor feature, according to the National Association of Home Builders. "Exterior lighting -- specifically, wall lanterns and landscape lights for accent plus above ground spotlights aimed at the front wall -- makes an attractive first impression and enhance curb appeal after dark," says Neil Parsons, owner of Design Build Pros, a Toms River, New Jersey, remodeling firm.

The lighting at this four-bedroom, 4½-bathroom Cave Creek, Arizona, home illuminates the front walkway, with recessed fixtures along the front porch.

Buyers who want this feature: 89 percent

Cost to buy and install: $270-$800 per window

Swapping out your old windows for new fuel-efficient versions (similar to the window replacement done to this Lawrenceville, Georgia, home) will help your home stand out to buyers looking to cut down on utility costs.

Energy Star-qualified windows, which can help reduce energy bills by up to 15 percent, come equipped with an invisible coating, vacuum-sealed spaces filled with inert gas between panes, sturdier weather stripping and improved framing materials -- all of which reduce undesirable heat gain and loss in the home. "Buyers are most impressed with smart, energy-efficient choices that in no way limit their comfort, but in every way save them money in the long run," Lewis says.

Buyers who want this feature: 86 percent

Cost to install: $2,025-$2,363 for a 380-square-foot space (including adding cabinetry, a peg wallboard for tools and improved lighting and electrical circuits)

Buyers with growing families need lots of storage space. "A seller should ensure that such bonus space is easily accessible and wonderfully organized," Lewis says. Additional storage units in the garage (similar to this Wilsonville, Oregon, home) help to keep clutter out of the main living areas. Unlike an attic or backyard shed, the garage is easily accessible.

Buyers who want this feature: 85 percent

Cost to install: $1,000+

Eat-in kitchens are a must-have for many, especially families with children. "[It] adds soul to a home," Lewis says. It's a space where families often congregate in the morning for breakfast. Or in the evening for dinner so everyone can share highlights from their day.

If you're looking to maximize space by knocking out a wall to allow for a small table and chairs in your kitchen (similar to the recently remodeled Salt Lake City home shown here), you should first determine whether the wall is structural or load bearing, Parsons says. Another concern is the possibility of mechanicals in the wall, such as plumbing, duct work and electrical wiring, that may need to be removed, he adds. Lastly, once an interior wall has come down, the flooring material that surrounds the drywall and base molding will need to be patched up. Removing a wall is relatively inexpensive, but that price can quickly escalate if additional repair work is needed, Parsons warns.

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Additional storage space in the kitchen is a big plus for potential home-buyers. Walk-in pantries that have built-in organization systems help make an tight space feel less cluttered. "The key is [having] strong adjustable shelving that allows people to change things around as their needs change," Sullivan says. It's a bonus if your pantry also allows you to neatly tuck away mops and brooms.

The walk-in kitchen pantry in this Hoover, Alabama, home has several built-in shelving units, counter space for small appliances and storage hooks for mops and brooms.

Buyers who want this feature: 50 percent

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Wireless home security systems rank the highest among technology features buyers would like to have most, according to homebuilders association. Systems that can be easily controlled by a tablet or smart phone app are especially attractive, Parsons adds. Installing a wireless home security system is less expensive than a hard-wired version and doesn't require professional assistance to install.

The two-bedroom, two-bathroom condo in the trendy Dupont Circle neighborhood of Washington comes with a wireless alarm system.

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