Proposals found in Basel III to raise capital requirements for mortgage loans would increase borrower costs for traditional mortgages and make nontraditional mortgages less available at regulated banks, according to a commentary from ""Fitch Ratings"":http://www.fitchratings.com/web/en/dynamic/fitch-home.jsp.[IMAGE]
""U.S. regulators' Ã¢â‚¬Ëœnotice of proposed rulemaking' (NPR) addressing capital requirements and risk-weighted asset (RWA) calculation criteria would, if adopted, ultimately push banks away from all but the most conventional and low risk forms of mortgage lending,"" Fitch stated.
Nontraditional loans that carry higher risks fall under Category 2, while traditional loans are in Category 1. Under the NPR, Category 2 loans, such as negative amortization mortgages, loans with a balloon payment, loans lacking verification of a borrower's ability to repay, loans that take more than 30 years to mature, require banks to hold two to three times more capital, Fitch explained.
""For example, current capital rules place a 50% risk weighting on mortgages with an 85% loan to value. However, under the NPR, the same loan could generate a 150% risk weighting if classified as a Category 2 loan,"" the agency stated.
Fitch also added that under current regulations, risk-based capital charges are not applied to mortgages that are sold, even when the seller provides representations and warranties to buy back loans that go into default within 120 days of sale.
However, under the NPR, lenders would be required to ""hold capital for the duration of the credit-enhancing reps and warranties, including early default and premium refund clauses that regulators regard as off-balance sheet guarantees,"" the agency explained.
Thus, Fitch said the proposed capital changes will lead banks to pass on the additional capital cost to borrowers for traditional loan products, and with ""the stricter treatment of Category 2 loans in the NPR and Dodd-Frank Act, it is unlikely that banks will continue to originate or sell significant volumes of nontraditional mortgage products, thereby reducing availability of credit to many borrowers.""