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Tighter Lending Rules Needed: FDIC's Bair

CNBC.com
Thursday, 9 Sep 2010 | 7:03 AM ET

Regulators should tighten lending rules for home mortgages in the US and the government is taking on a lot of risk by guaranteeing risky loans, Federal Deposit Insurance Corporation Chairman Shelia Bair warned.

"I think we should all be concerned about the type of exposure that the government is taking on through guaranteeing so many mortgages right now, and make sure that we do have some prudent underwriting standards, and especially documented ability to repay," Bair told CNBC Wednesday.

Banks & the Housing Fix
Insight on whether banks should practice tighter more conservative lending practices and qualifications, with Sheila Bair, FDIC chair.

Bair called for a new set of "common sense" rules that would apply to both bank and nonbank mortgage sellers, ensuring the borrower has the capacity to repay a mortgage and makes a larger down payment than is currently required.

"Clearly there is a strong correlation between the amount of skin in the game a borrower puts in up front and how that loan performs," she said. "And it's only common sense. Do you put 20 percent down? You're committed to that house. You walk away from that house, you're going to lose a lot of the money that you put in up front."

Policymakers were trying to balance the need for prudent underwriting with a need to support what is still a very distressed housing market, she said.

"Going forward, the standard as we emerge from this crisis should be very robust income documentation, ability to repay standards, and some significant down payment," Bair said.

The housing market, which in 2009 suffered its worst downturn since the Great Depression, had stabilized somewhat and credit standards were improving, Bair said, but it was unclear what a double-dip recession might do to house prices.

The likelihood of a renewed economic slump had increased somewhat, Bair said, but FDIC economists were not forecasting a double-dip scenario.

“Banks are in a better position now because loan quality has improved considerably over the last few years, and so I think they're in a better position to withstand it if we have another downturn,” she said.

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