Will Bureaucrats Prevent You From Buying a Home?

So Far, So Good

After Congress laid out the framework for risk retention and qualified safe mortgages, six federal regulatory agencies had to agree on what qualifies as safe and what doesn’t. The agencies published their proposal on March 29. Under the proposed rules, hopeful homebuyers would have to make down payments equal to at least 20% of the home’s value to qualify as “safe.” Buyers’ mortgage payments would be limited to 28% of their gross income, and their total debts could be no higher than 36% of their income.

The plan would affect current homeowners, too. If the rules are finalized by the agencies in their current form, the rules would require homeowners to have to least 25% equity in their homes to obtain a qualified refinance loan.

The proposed rule is “designed to ensure [qualifying mortgages] are of very high credit quality,” according to a press release by the Federal Reserve.

[Article: Play It Again, SAM]

An Overcorrection for A Phantom Problem?

There’s no doubt that under the proposed new rules, qualified mortgages would be of very high credit quality.

They also could be very hard to find.

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The median home in the U.S. cost $172,900, according to the Center for Responsible Lending. Even if the regulators reduce their down payment requirement to 10% of the home’s value, that would still place the American Dream out of reach for millions of working people, the center says, because non-qualified mortgages will be more expensive for banks, and those banks will naturally pass those expenses on to borrowers.

“We think it would unnecessarily raise the cost of homeownership for millions of Americans who are credit-worthy, and push them out of the market,” Day says.

The average firefighter would need 10 years to save up a 10% down payment, according to a report by the center. Teachers would need more than 14 years. A staff sergeant in the U.S. Army would need 16 years.

“A 20% down payment across the board is not in my mind necessarily realistic,” says Robert Clarke, who served as Comptroller of the Currency under Presidents Reagan and George H. W. Bush.

Besides, low-down payment loans didn’t cause the Great Recession, says Mechem. In fact, loans with down payments as low as 3% are performing just as well as traditional mortgages with higher down payment rates, according to says John Mechem, spokesman for the Mortgage Bankers Association.

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“We don’t understand why the debate is even over setting a minimum down payment, because it wasn’t low down payments that caused this problem,” Day says.

What was risky, and what actually caused the recession Mechem says, were loans that included “stair-step” interest rate increases, contained large hidden balloon payments, and didn’t require homebuyers to prove their income. Such loans were created by lenders and securitizers in the waning years of the housing boom specifically to keep the loan fees flowing by lowering the initial mortgage payments, which made homes more affordable to buy on the front-end, according to the Financial Crisis Inquiry Commission’s final report.

The problem, therefore, was never down payments. It was what happened after the down payment was made.

“The loan products that caused this problem—interest-only, negative amortization—we agree to having those in the definition” of a non-qualifying loan, Mechem says.

But tacking on high down payments and tight debt-to-income requirements takes a good idea too far, according to many consumer and industry advocates.

“We believe the regulators went too far beyond the intent of Congress,” says Mechem.

Most members of Congress appear to agree. In joint letters to the regulators, 282 members of the House and 33 Senators warned regulators that their proposed rule ignores the “clear guidance” of Congress.

“The proposed regulation goes beyond the intent and language of the statute by imposing unnecessarily tight down payment restrictions,” according to one of the letters sent by Senators. “These restrictions unduly narrow the QRM definition and would necessarily increase consumer costs and reduce access to affordable credit.”

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