Realtors Trying to Head High Down-payments Off at the Pass

The housing and financial crisis of the past few years has caused Congress to take another look at the regulations surrounding these two industries. The Dodd-Frank Wall Street Reform and Consumer Protection Act, which was signed into law by President Obama last July, contains a number of new regulations and reforms many others. Several of these relate to home mortgages, and, unfortunately, the end result may be that it becomes almost impossible for the average household to purchase a home.

The ultimate reason this is so comes down to the risk retention section of the Act. The inter-agency group working on this act is considering a change to the loan standards for a Qualified Residential Mortgage (QRM) that would necessitate extremely high down-payments –as much as 10 or even 20%. As the vast majority of home loans are QRMs, this will effectively rule out home ownership for anyone who can not come up with the requisite large down-payment.

A quick look at the numbers will show why this is the case. The median home price in 2009 and 2010 was $170,000. Assuming closing costs of 5% of the home value, this translates into a 20% down-payment of $42000, or $27,000 for a 10% down-payment. A family making the median income of $49,777 would take 14 and 9 years, respectively, to save enough to meet these requirements, and that’s assuming a savings rate of $3,000 a year, or more than 6%. The current national savings rate is 5.8%.

Families who make less than the median income, or those who live in areas with high home prices, would have to save even longer. A newlywed couple might have children leaving for college before they managed to save enough to put down on a home. The institution of these requirements would be a disaster for the real estate industry and put home ownership out of reach for tens of millions of families.

Fortunately, the National Association of Realtors is fighting these new regulations. On March 16 they, along with two other organizations, sent a joint letter to the group of regulators considering these requirements and urged them to abandon the plan in favor of more reasonable approaches. There are other options the group could pursue, as NAR pointed out in their letter. A better approach would be the adoption of stronger core standards for mortgage underwriting. This would lower the risk of default. Such standards would include strong documentation requirements, prohibitions on high-risk loan features like balloon payments, and requirements that the lender assess the borrower’s ability to repay the loan.

All of these reasonable requirements were ignored by many lenders during the housing boom, and now all homeowner’s may pay the price. Low down-payment loans have been around for decades and have tended to work quite well. If regulations are put into place that will prohibit predatory lending, they will continue to work in the future. There is no need to arbitrarily lock tens of millions of families out of home ownership to achieve the goal of stability in the housing market.