Regulators, including the Federal Reserve and the FDIC, reportedly want to ease a proposed requirement that banks hold 5 percent of the mortgage securities they sell to investors. Oversight agencies initially viewed the mandate -- which excludes home loans that meet certain stipulations, such as a 20 percent down payment -- as a way to avoid the problems that arose when bond issuers were not diligent about the quality of loans in their securities. They now want to relax the requirement so that it applies only to interest-only mortgages and no- or low-documentation loans. While representing a much smaller slice of the mortgage market, these products carry the greatest risk and contributed heavily to losses during the financial crisis. The regulators' about-face on the "skin-in-the-game" rules would count as a win for an unusual alliance of banks and consumer advocates that have opposed the new rules largely on the grounds that they would restrict lending. Critics also have warned that the rules would inflate costs for lenders and consumers alike, because loans that did not qualify for exemptions would bear higher interest rates.
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