Thursday, April 21, 2011
A proposed rule intended to prevent the kind of reckless lending and borrowing that heaped so many toxic mortgages into the marketplace in recent years has alarmed some groups, who argue the unintended consequences could worsen the nation's housing troubles.
The plan would require home-owners to make down payments of at least 20 percent of the cost of a home.
"It's a good thing to have more equity in your house, but it's not a good thing for the federal government to set a 20 percent down payment as the gold standard of mortgage underwriting," said Barry Zigas, director of Housing Policy for the Consumer Federation of America in Washington, D.C.
"Our ample experience over the past 20 years shows that borrowers with less down payments, with fully underwritten and sound mortgages, can be successful homeowners."
The multiagency proposal is backed by the Federal Deposit Insurance Corp., the Federal Reserve, the U.S. Department of Housing and Urban Development, the Federal Housing Finance Agency, the Office of the Comptroller of the Currency and the Securities and Exchange Commission.
Public comments on the proposal will be accepted until June 10. The six agencies will evaluate the comments, make necessary changes and finalize them before carving a new rule in stone.
"We don't know what the final rule will look like or what the time frame will be," said David Barr, spokesman for the FDIC in Washington, D.C.
As proposed, the 20 percent down payment requirement, which grew out of the Dodd-Frank regulatory overhaul enacted in July, would not apply to all residential mortgages.
It is intended to apply to mortgages that banks plan to package as mortgage-backed securities to sell to investors. If lenders do not require a borrower to make the 20 percent minimum down payment, the financial institutions would be required to hold at least 5 percent of the value of the loan on their books, a move to make sure they, too, would lose if a loan goes bad.
Banks typically reserve about 1 percent of their total loan portfolio against losses.
The central question in the national debate is whether it is necessary to have so much equity to be a successful borrower and what impact it would have on middle-class and working class families who could not easily save that kind of money.
In the Pittsburgh metropolitan area, where the median price of a single-family home stands at $123,900, a 20 percent down payment amounts to $24,780, not including closing costs.
Groups that oppose the proposal say banks will either decide not to lend money to people who don't have 20 percent or will charge higher interest and fees to offset the bank's cost of holding the 5 percent reserve.
It is unclear how soon the rule would impact the housing market, if it is approved. Most home loans in this country are insured by federal agencies, such as Federal Housing Administration with its 3.5 percent down payment. Those mortgages would continue to be exempt from the 20 percent requirements.
But not all borrowers or properties qualify for federal programs.
"I am very much opposed to the proposal," said Howard "Hoddy" Hanna, president and CEO of Howard Hanna Real Estate Services, based in O'Hara. "There is definitely a public policy movement in Washington, D.C., that will prohibit less affluent working class people from buying a home.
"Certain segments of the population will probably not be able to own a home in this generation if this proposal become reality."
The new rule establishing guidelines for the Qualified Residential Mortgage rule would be a complete pendulum swing from the days of easy credit, which gave birth to mortgage innovations that fueled the housing boom.
Gone are the years when subprime loans with little or no down payment were readily available to people with troubled credit histories.
While they are still available, adjustable rate mortgages with floating interest rates that can go up over time have fallen out of popularity. Interest-only mortgages are rare these days, and stated income loans that require no proof are nonexistent.
Back when such exotic mortgages were in their heyday, lenders would securitize them and resell them to investors around the world.
The lenders collected a hefty fee and had no liability if the loan failed.
The 5 percent risk retention rule would make sure that if lenders did not require borrowers to put 20 percent down, the lender would still have a stake in the loan being repaid.
According to the National Association of Realtors in Washington, D.C., first-time homebuyers in 2010 made a median down payment of 4 percent on their homes. Repeat homebuyers made a median down payment of 16 percent.
Data released by Ginnie Mae showed FHA and Veterans Administration loans turned a modest profit to the U.S. Treasury and have never needed a bailout.
"We believe low down payment mortgages should continue to be available to buyers who have demonstrated financial responsibility and are willing to stay well within their budget," said Walter Molony, spokesman for the National Association of Realtors.
The mortgage crisis had its roots in the U.S. government's efforts to increase homeownership, especially among minorities and other low-income groups.
Many fear this new proposal will instead create more hurdles for them.
"In principle, it's a good idea to have more equity, but in practice it is far from the reality of the marketplace," said Michael Sichenzia, a mortgage expert based in South Florida.
"For the average 24- to 35-year old -- who statistics tell us 39 percent of them still live at home with their parents -- it will take them 14 years to save a 20 percent down payment for the median house for sale in America today."
Harlan Platt, a professor of finance at Northeastern University, said the proposed regulation followed the model used in Canada where it is very difficult, if not impossible, to get a mortgage without a 20 percent down payment.
"I suspect regulators have noticed the financial crisis did not affect Canada," he said.
"But what they have not noticed is homeownership percentagewise in Canada is far below what it is in the U.S."
Mr. Platt is convinced that if the rule is approved, home prices could decline and more people with homes underwater -- the houses are worth less than the owners owe -- will walk away, creating a bigger overhang of unsold properties.
"[Regulators] are behaving like a farmer whose cow ran away through the open barn door, and their response is to close the barn door," Mr. Platt said. "What they should do is examine whether banks are doing their due diligence when someone applies for a mortgage, and not create barriers for people who don't have 20 percent."
The new rule would apply to the conventional loan market.
The Obama administration and members of Congress are taking steps to reduce the role of government-backed mortgage giants such as the Federal National Mortgage Corp. (Fannie Mae) and Federal Home Loan Mortgage Corp. (Freddie Mac), which use government money to buy mortgages on the secondary market.
Their future role in home mortgage lending could be changing.
Keith Gumbinger, vice president at HSH.com, a financial publisher in Pompton Plains, N.J., specializing in mortgage information, said only 26 percent of the borrowers in Fannie Mae and Freddie Mac portfolios would qualify for a mortgage under this rule.
This suggests that a large swath of the homebuying market would either face higher costs or have to wait to accumulate sufficient funds, which would place downward pressure on home prices.
"In this way, the rule would be considered bad," he said, "at least to those hoping to buy or sell their homes or recover from underwater situations in any sort of a timely fashion."
By Tim Grant, Pittsburgh Post-Gazette
Read more: http://www.postgazette.com/pg/11111/1140802-28-0.stm?cmpid=newspanel3#ixzz1KGjnOFYL
