A proposal to federal regulators involving new regulations governing qualified residential mortgages that would mandate a 20 percent down payment for consumers wishing to qualify for a conventional, non-government- backed residential mortgage, has prompted action among the real estate industry. Realtors say if allowed to take effect, the new QRM rules would exacerbate the ongoing housing and lending crisis in America.
According to the National Association of Realtors, 60 percent of recent home buyers made less than a 20 percent down payment. The national group’s data also shows it takes 14 years for a typical person to save a 20 percent down payment to buy a median-priced home. The proposed QRM rule would create an enormous down payment requirement and reduce the availability of affordable mortgages for qualified consumers. Few borrowers would be able to meet these requirements and those that do would be forced to pay much higher rates. Additionally, fees for safe loans did not meet the exceedingly narrow QRM criteria.
A provision in the Dodd-Frank Act signed into law last year requires that financial institutions retain 5 percent of the risk on loans they securitize. The purpose is to discourage excessive risk-taking and create strong incentives for responsible lending and borrowing. Exempt from the requirement are certain QRMs; FHA and VA mortgages are also exempted.
“NAR firmly believes Congress intended to create a broad QRM exemption—strong evidence shows that responsible lending standards and ensuring a borrower’s ability to repay have the greatest impact on reducing lender risk, and not high down payments,” said the national group’s president Ron Phipps. “Saving the necessary down payment has always been the principal obstacle to buyers seeking to purchase their first home. Proposals that require high down payments will only drive more borrowers to FHA, increase costs for borrowers by raising interest rates and fees, and effectively price many eligible borrowers out of the housing market.”
Realtors say the proposed rule would not only affect buyers, but it would also affect the ability of home-owners to sell their homes, since there would be fewer buyers who could qualify for home ownership. NAR wants federal regulators to honor congressional intent by crafting a QRM exemption that includes a wide variety of traditionally safe, well-underwritten products, such as 30-, 15- and 10-year fixed-rate loans; 7-1 and 5-1 ARMs; and loans with down payments in the 5 percent to 20 percent range with PMI, where required, and with other features found in low-risk loans, such as no prepayment penalties or balloon payments.
“We are asking our representatives to make it clear to the regulators that this proposed regulation was not their legislative intent, and to instead implement a more reasonable QRM that will keep creditworthy buyers in the market and able to acquire a loan,” said Gene Lentz, president of the Silicon Valley Association of Realtors. “If allowed to take effect, the rule would put home ownership out of reach for middle-income Americans.”