My Next Cause
On the heels of covering Delaware’s Civil Union bill in the last few issues, I thought it would be a good time to delve into some other controversial and potentially far-reaching legislation: in this case, facing the mortgage and housing industries.
When I entered the mortgage industry back in the late ‘90s, I was always surprised by the number of inquiries by would-be home buyers, who felt they needed 20% down payment in order to buy a home. I remember saying, “Oh no, those days are long since past. The industry now has many types of financing to accommodate those with less to put down.”
That was then, this is now. Of course, the path taken from that point in the ‘90s to where we are today has been a volatile and costly one in ways that escape the scope of this column. And while the lending industry may be blamed for contributing to the economic collapse of the last several years, it’s becoming harder to deny that lending guidelines have now swung too far in the opposite direction.
Looming on the horizon is another regulation that has the potential to have the most substantial negative impact on the industry yet. As part of financial reform legislation drafted last year by Senator Chris Dodd (D-CT) and Representative Barney Frank (D-MA), known as the Dodd-Frank Financial Reform Law, Congress created a plan that was intended to improve the quality of mortgage lending and restore private capital to the housing market.
This legislation created the Qualified Residential Mortgage (QRM), which, among a host of other provisions, would require a minimum 20% down payment in order to purchase a home. The bill was originally defined to include mortgages with product features and sound underwriting standards for responsible buyers that have been proven to reduce default.
Unfortunately, banking regulators have instead defined it to mean loans with a minimum down payment, yet research has shown that well-underwritten, low down payment home loans have been a significant and safe part of the mortgage industry for decades.
The National Association of Realtors (NAR) opposes the rule and has been meeting with lawmakers and regulators this spring saying this isn’t what Congress intended when it passed the legislation creating the QRM. NAR believes the QRM rules are devastating to Americans as they will prevent millions of credit-worthy home buyers from purchasing a home, causing a major setback for the housing industry as it slowly emerges from its worst downturn since the Great Depression.
According to an analysis by the Community Banking Project, a coalition of independent mortgage brokers, the legislation would prevent approximately 30% of prospective home buyers from being able to purchase a home. Disproportionately affected are first-time buyers and low-to-middle income buyers.
“First-time home buyers historically average 40% of home-buying activity. It would take an average family 12 years to scrape together a 20% down payment,” said National Association of Home Buyers chairman Bob Nielsen. “This would disqualify about five million potential home buyers, resulting in 250,000 fewer home sales and 50,000 fewer new homes being built per year,” said Nielsen.
To meet the 20% down payment, the buyer of a $172,000 median-priced home, including closing costs, would need more than $40,000 to close, creating an insurmountable barrier for most American families.
In researching this column, I spoke with my former employer, Kimberly Grim, District Manager of Fairway Independent Mortgage, who provided a local opinion. “First time homebuyers will feel the biggest impact and this will have the largest effect on our economy. During every housing downturn, we’ve always been in a position to rely upon first-time homebuyers to continue fueling the market with transactions.”
“First time buyers rarely have 10% for down payment, let alone 20%. Taking this away would be crushing for our recovery since almost half of all transactions last year were from first time homebuyers. Having to come up with 20% down would further preclude most people from purchasing another home,” said Grim.
In addition, existing homeowners looking to refinance would also be impacted. Under the new rules, 25% equity would be required in order to refinance, potentially preventing an estimated 25 million current homeowners from refinancing at lower rates.
This would also dramatically affect the number of second home purchases as millions of Americans have used equity in their primary residences, in the form of home equity mortgages, to purchase a vacation home.
According to Grim, “Most of the second home purchases in the past ten years were done with the aid of a home equity loan to avoid private mortgage insurance. The home equity loan was either on the home they were purchasing or the home they currently owned. With the decline in values over the past few years, most people have lost all of their equity in their current home which will preclude them from borrowing money from their primary residence.”
On March 29, the FDIC (Federal Deposit Insurance Corp.), HUD (Housing and Urban Development), and the SEC (Securities and Exchange Commission), and others, approved the “risk retention proposal,” and published it in the Federal Register.
By law, a 60-day public comment period is currently underway after which the agencies will make a final decision. The agencies set a “tentative deadline of June 10” to issue their final ruling. The QRM rule would become effective one year after the final rule is published in the Federal Register.
Get involved! This has the potential to affect millions, perhaps many of you. Contact your U.S. Representative and ask him/her to make it clear to regulators that this proposed regulation was not their legislative intent and to instead implement a more reasonable QRM that will allow credit-worthy buyers to acquire a loan and experience a part of the American dream.