Lenders, home builders and real estate agents fighting a new regulation that could significantly raise down payments and loan-to-value ratios are gaining support from an unlikely quarter.
Consumer and liberal organizations concerned about the ramifications of high down payments on access to homeownership for lower income and minority populations are joining the industry-led chorus of opposition to the regulation, formally proposed last week by the Federal Housing Finance Administration. The regulation would create “qualified residential mortgages” that would be exempt from risk retention requirements by lenders, but borrowers would be required to pay a 20 percent down payment for new mortgages and meet a 75 percent loan-to-value ratio for refinances.
As the Administration and ultimately Congress decide the issue over the next few months, the liberal opposition could play a decisive role among Democrats on the Hill and in the White House. Potentially the opposition could unseat the bi-partisan alliance of Democratic senators Mary Landrieu of Louisiana and Kay Hagan of North Carolina and Republican Sen. Johnny Isakson of Georgia that wrote the QRM exemption into financial reform legislation last year.
“We have learned a great deal in the last 20 years about how to finance sustainable homeownership without requiring unreasonably high down payments. Turning back the mortgage clock to sometime in the 1980’s by raising down payment requirements to an arbitrary level is unjustified and will close the door to responsible homeownership for too many American working families” said Barry Zigas, Director of Housing Policy for Consumer Federation of America in January.
The CFA and the Center for Responsible Lending, the two leading consumer groups in mortgage finance, signed on to a letter opposing the regulation with the National Association of Realtors and the National Association of Home Builders.
“We argue that this would make buying a home more costly, lock out many first-time homebuyers, and short-circuit a recovery of the housing market,” said
CRL in a statement on their web site.
The Center for American Progress, a non-profit group founded by former Clinton Chief of Staff John Podesta, published a widely circulated critique of the proposal written by Ellen Seidman, former director of the Office of Thrift Supervision in the Clinton Administration.
“Done badly, the rule could essentially lock first-time homebuyers in particular out of all but the government-insured mortgage market. This would further increase wealth inequality in general, and especially across racial lines,” she wrote.
“Of more direct interest to those concerned about housing policy, the QRM definition may also influence the availability, price, and terms of mortgages that do not carry a direct federal guarantee. For instance, it is likely that non-QRM mortgages-those requiring risk retention-will be more expensive for borrowers than those within the QRM definition. Non-QRM mortgages also may be less generally available, and may carry more risky product structures, although they conversely may well be subject to less-restrictive underwriting standards,” she said.
The QRM definition may also have an impact on the willingness of any originator-especially a bank subject to regular examinations-to make any mortgage that doesn’t meet the QRM definition-even if the bank initially intends to hold that mortgage in its portfolio. Will bank examiners explicitly or implicitly look upon non-QRM loans as “unsafe” even if the lender is keeping 100 percent of the risk on its books? In particular, if the regulators-contrary to the apparent intent of the statute-define QRM to require a 10 percent or 20 percent down payment, will anyone be willing to originate an affordable low-down-payment loan not insured or guaranteed by the FHA, VA, or USDA?” she said. “The rule’s unintended consequences may well be its most important,” she concluded.