The Obama administration on Monday formally ended a controversial policy that allowed banks to hold mortgage-backed securities for up to seven years while they were sold to investors.
Under the rules, lenders could hold the securities for as long as the borrower was alive, provided they held the same amount of the securities in a secured bank account as they did in a personal loan, according to the Department of Housing and Urban Development (HUD).
The policy, known as “Borrower Holdback,” allowed the government to retain the proceeds from the sale of these securities while the government took a cut of the total value of the mortgage backed securities sold to buyers.
It was meant to help stabilize the housing market and to provide relief to borrowers who could not pay their mortgages.
But in February 2017, HUD officials changed the rules after the bank holding company in charge of the sale, U.S. Bancorp, raised concerns about the program.
The changes were made to the rules in June 2017.
“The Department of HUD today formally rescinded its Borrower Refinancing Program, effective June 15, 2018, and requires lenders to cease the use of the Borrowers Holdback Program by the end of 2018,” the department said in a statement.
The new rules require lenders to sell their mortgage- backed securities to a buyer on an equal basis and require lenders not to sell the securities to more than five investors.
In a letter to the National Association of Home Builders and other lenders, HUD said the new rules “will also be effective on the date the final rule is issued and applicable to a borrower who is deceased.”
The Borrowor Refinance Program was originally launched in the aftermath of the 2008 financial crisis and was intended to be an incentive to banks to refinance their loans, but the program has since been used to hold down the mortgage rates of borrowers.
Under the program, banks can use the proceeds to buy back the mortgage-related securities they held before the foreclosure, rather than holding them for longer periods.
In 2016, the administration announced a $50 billion plan to help banks refinance loans, and it will continue to spend money on the program even after the Trump administration ends it.
In April, the Obama administration announced that it would suspend the use and transfer of the program for the 2018-2019 fiscal year, and the program will no longer be available for the next fiscal year.
The program was supposed to expire on June 30, 2018.