So, you're thinking about buying a home. You haven't won the lottery, so you're going to use a mortgage. I hope you've been saving your pennies - 5 million of them. If regulators in Washington have their way, that's what it's going to take to buy an average-priced home in Houston.
Last summer, Congress passed a sweeping overhaul of the financial system called the Dodd-Frank bill. That bill created a new class of mortgage loans called "qualified residential mortgages" (QRMs). This class is important because the bill makes it harder for mortgage lenders to securitize any loan that is not a QRM, and securitization is the grease that makes the mortgage market work and keeps interest rates low.
The problem is the bill left it to regulators to define a QRM, and as regulators seem apt to do, they have made a mess of things. The proposed definition for QRM is a 20% down payment with other limiting restrictions. In Houston, to buy a $263,700 average-priced home, that means you would need $52,740 for the down payment.
The proposed definition for QRM is a 20% down payment with other limiting restrictions. In Houston, to buy a $263,700 average-priced home, that means you would need $52,740 for the down payment.
Senators inserted the QRM language into Dodd-Frank in an effort to encourage less risky lending. But as with a lot of government meddling, the unintended consequences may be horrendous. Many industry pundits expect the QRM to become the new "conforming" mortgage, the loan product offering the lowest interest rates. Non-QRM loans are likely to have interest rates as much as 2% higher.
The real estate industry and consumer groups are united against this proposed definition. The Community Mortgage Banking Project released a report in March that analyzed 33 million home loans written between 2002 and 2008. The results showed higher down payments had a very small impact on mortgage defaults. Doubling the down payment from 5% to 10% only reduced the default rate by 0.2% to 0.3%, and increasing the down payment requirement to 20% would eliminate between 27% and 40% of potential homebuyers from eligibility for a loan.
Consumer groups point out that middle-class and minority borrowers would feel the greatest impact from the proposed definition. A recent study showed it would take the average consumer more than a decade to save the required 20% down payment in most parts of the country. Homebuyers unable to afford the minimum down payment would be considered high risk even if they have an otherwise stellar credit history.
The senators responsible for QRM recently wrote regulators advising them that they intentionally did NOT include a down payment requirement in the definition and they never intended the definition to be so strict. More than 160 House lawmakers also wrote to regulators stating that the "overly burdensome dictate could threaten a full-fledged economic recovery."
Regulators responded to all this pressure by extending the comment period for the definition to Aug 1. It is not clear whether regulators are having second thoughts, but at least this gives lawmakers, consumer group, industry representatives, and YOU more time to encourage them to develop a more reasonable definition.
If you have a mortgage question, please leave a comment below, and I'll address it in an upcoming column.
Steve and his wife have owned an Austin mortgage company, Texas Lone Star Lending, since 1996.