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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.

Left Unloads on Qualified Residential Mortgage Rule

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.

3 comments

  1. Home buyers who first save enough to cover a 20% down payment, closing costs and moving/furnishing expenses will pay much less for that home over the life of the loan. That requires under consuming and becoming a disciplined saver, which is the basis of a sound economy and should not have gone out with the ’80′s. As I work with pre-foreclosure owners seeking a short sale of their home, I find nearly all of them borrowed or refinanced up to the market value at the time. And I find those homes to be filled with late model vehicles, toys, electronics, pets, satellite TV service, etc. They could have postponed all of that consumer spending, saved money while developing financial discipline, then purchased a home. First time buyers who start with no equity and no financial discipline are very vulnerable to losing that home, due to even minor set backs. Those who truly aspire to own a home should have a plan for paying off their loan and mitigating any risks that could lead to default. Postponing consumption, saving, developing discipline, bargain shopping are timeless means towards security. There is nothing progressive or sustainable about trading those for an over leveraged lifestyle.

  2. Great article and great comments from Tom. I agree that buying a home should not be taken lightly and people should have a vested interest. They are more likely to avoid default if they actually have something to lose. Thanks for posting.

  3. It seems like a good idea to me. And people will sooner or later be able to buy homes. This will come in a combination of people becoming savers and from house values lowering to a price where people can afford them. I read somewhere that another part of that rule/law is that people will only be able to spend 28% of their income on housing. That’s another great idea. It’s ridiculous to think that people will pay 45-55% or more on housing. It’s not realistic. There’s an argument that people know what’s best for them and the government shouldn’t get in their way. The mortgage meltdown/Great Recession is a perfect example of how irresponsible a large portion of people are. And there’s a point where that irresponsibility affects all of us. What will make much of this moot is that FHA/Fannie/Freddie loans seem to not be included in these limits and down payments. If you ask me, it’s even more important for government backed loans to be responsible. I can’t understand why the government is comfortable taking on the extra risk… especially with all of the mortgage crap that we’re currently living through.

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