By Robert Freedman, Senior Editor, REALTOR® Magazine
Some federal banking regulators think a conventional residential mortgage loan isn’t safe unless it comes with a minimum 20 percent down payment.
The country’s six banking regulators have been hammering out rules for what’s known as the qualified residential mortgage (QRM), and if they in fact decide that a qualified residential mortgage must include at least 20 percent down, the ability of your customers to get mortgage financing for a home purchase could be greatly affected—and probably not for the better.
You might be wondering what a qualified residential mortgage is is and why it’s suddenly become so important to your business.
Its genesis is legislation that passed last year to curb the kind of lending excess that led to the mortgage meltdown several years ago. The law requires lenders to keep on their books 5 percent of the value of mortgage loans that are packaged into securities for sale to investors. The 5-percent risk-retention is intended to ensure lenders maintain skin in the game on the loans they make so they won’t make loans of dubious quality. One of the criticisms of the private-label securities that were so popular during the housing boom is that lenders were making loans whose quality they knew was poor because the loans would be securitized and sold to investors around the world, effectively making any future losses caused by the bad loans someone else’s problem.
During development of the legislation, NAR and other industry groups supported the goal of protecting against these kinds of poor loan writing practices, and they also wanted to ensure safe, affordable conventional mortgage financing remained available to responsible borrowers who took out loan amounts that they could afford. To that end, the legislation included an exemption from that 5-percent risk-retention requirement for conventional conforming mortgages.
The idea was that lenders would maximize the availability of safe, affordable loans if they didn’t have to retain the 5-percent holdback for these loans. Lawmakers thought the exemption made sense, because they recognized that these conforming loans —that is, the kind of bread-and-butter loans that Fannie Mae and Freddie Mac handle in their regular business—were never part of the mortgage mess. It was the exotic loans—the stated income, negative amortization, and others—that caused the problems.
As it is, the conforming loans made in the last year or so and handled by Fannie Mae and Freddie Mac are among the most well-performing loans ever, NAR Chief Economist Lawrence Yun has said. That’s easy to understand when you consider how much lenders have tightened their underwriting standards since the downturn, making it hard in many cases for even creditworthy borrowers to get affordable, safe financing.
It’s these safe, conventional loans—i.e., “qualified residential mortgages”— that lawmakers had in mind when they carved out that exemption from the 5-percent risk-retention requirement. But now that regulators are fleshing out the rules for that exemption, they’re talking about requiring these loans to have a minimum 20 percent down. According to a Wall Street Journal article, the Federal Reserve, the FDIC, and the Office of the Comptroller of the Currency are leaning toward requiring 20 percent down. The three other regulators—HUD, the Federal Housing Finance Agency (FHFA), and the Securities and Exchange Commission—haven’t said publicly if they’re leaning that way, too. The regulators are hoping to release their proposed rules in April.
Considering that conventional mortgage loans, including those with 10 percent or even 5 percent down, were not the loans that posed a problem to the mortgage market and that today continue to perform well, the 20 percent is excessive, critics say.
More importantly from the standpoint of sales, requiring even households with good credit risks to come up with 20 percent down could have a devastating impact on home sales.
The challenge would be especially hard for first-time buyers. According to data from NAR’s 2009 Home Buyer and Seller Profile, more than 75 percent of first-time buyers put down less than 20 percent. Only 13 percent made a down payment of 20 percent or more. Assuming a large percentage of those buyers put down less than 20 percent because they simply couldn’t afford to put down more, despite the fact they’re responsible borrowers taking out loans whose monthly payments they can comfortably afford, then you can see the kind of problem the 20-percent requirement would cause in markets around the country.
Even among repeat buyers, almost 65 percent of them made down payments of less than 20 percent.
NAR made its concerns clear in a letter it sent to banking regulators in January with other industry organizations. “It has been suggested that the QRM standard include a very high down payment requirement in order to limit QRM eligibility to some arbitrarily small percentage of the market,” the letter says. “Creating an inordinately narrow QRM exemption could cause significant disturbances in the fragile housing market.”
Along with NAR, the Center for Responsible Lending and the Consumer Federation of American were among the dozen signers of the letter. How regulators define a safe mortgage is of interest to consumer groups, too.
You can learn more in the video above with Ken Trepeta, head of NAR’s Real Estate Services division.