By Alan Zibel Of DOW JONES NEWSWIRES WASHINGTON -(Dow Jones)- Mortgage-lending rules being developed by federal bank regulators could wind up pushing more borrowers toward government-backed loans, a key House lawmaker warns. In a letter sent to regulators last week, House Financial Services Committee Chairman Rep. Spencer Bachus, (R., Ala). said the standards required by the Dodd-Frank financial overhaul might force borrowers to take out loans backed by the Federal Housing Administration, a federal agency that insures loans made to borrowers with low down payments. "It is not in the public interest for a government insurance program like FHA to dominate the market, especially if private capital is available to finance mortgages that exhibit a high risk of borrower default," Bachus wrote. The letter was obtained by Dow Jones Newswires on Monday. The Dodd-Frank law signed last summer mandated that banks retain 5% of the risk of a loan if it is packaged into a security and sold to investors. The idea was that, with more "skin in the game," banks will be more cautious because they will stand to lose if a borrower defaults. Regulators are working on defining which loans are deemed less risky and therefore exempt from those risk-retention requirements. In recent weeks, concern has been mounting in the banking industry that regulators will be strict in their definition, perhaps only allowing loans with a 20% down payment to receive the exemption. Most of the lending industry favors a broader definition. If those rules mandate a high down payments, they could harm the mortgage insurance industry, which allows borrowers to take out loans with lower down payments by collecting insurance premiums from borrowers. Large mortgage insurers include MGIC Investment Corp. (MTG), PMI Group Inc. (PMI), Genworth Financial Inc. (GNW) and Radian Group Inc. (RDN). Bachus's letter indicates that he favors a role for mortgage insurers. "One possible alternative is to allow the use of credit enhancements to offset part of the down payment requirement and, thus, help make homeownership more affordable." -By Alan Zibel, Dow Jones Newswires; 202-862-9263; alan.zibel@dowjones.com
