When the federal government took immediate measures in response to the housing crisis, their intentions were correct: protect as many families as possible from being displaced, fix regulations to ensure these mistakes never happen again and stabilize the financial markets. But a recently re-proposed risk-retention/Qualified Residential Mortgage Rule may hurt the very families we want to help.
In the aftermath of the crisis, Congress clearly intended to improve underwriting standards through the Dodd-Frank Act, but nowhere did they intend to mandate specific down payment requirements. Dodd-Frank set out to improve mortgage quality and transparency through two distinct rules. The ability-to-repay/Qualified Mortgage rule was designed by Congress to improve underwriting and protect consumers by ensuring they could afford to repay their mortgage.
The now-final QM rule clearly establishes safe and sustainable mortgage terms that protect all participants borrowers, lenders and investors against default. As part of its provisions, borrowers' total debt payments can't exceed 43% of their pretax income.This debt-to-income ratio, in concert with other underwriting metrics including credit history, employment stability, income, assets and collateral value are woven together to ensure ability to repay.
The QRM rule, conversely, was designed to protect investors from faulty packaging of the loan when it is delivered to secondary mortgage markets. It was also meant to address the failure of securitizers to exercise sufficient due diligence over the quality of what was being delivered. Further, the QRM rule is intended to preclude investors from having to worry about opaque features like documentation standards and risky product features, leaving them to focus their risk assessment on transparent, measurable factors like loan-to-value and credit.
We remain concerned that regulators are still seriously considering an alternative option that would add a 30% down payment or equity requirement to the QRM definition. Concerns for underwriting quality have already been addressed in the QM Rule. Further layering of ability-to-repay requirements and risk retention premiums will only further distort and bifurcate government guaranteed loans from private label mortgages, as government entities like the Federal Housing Administration, Fannie Mae and Freddie Mac are exempted from the QRM requirements.
The arbitrary introduction of a 30% down payment requirement will drive more loans to FHA, Fannie and Freddie, increasing their share of the market, contrary to the explicit objective of reducing the governments footprint in the housing market voiced by virtually every policymaker and stakeholder.
Placing a stringent 30% down payment requirement would not protect borrowers from risky practices. Instead, it would simply establish de facto "loan-to-value" credit standards for mortgages through the risk-retention requirement, which was not the intent of the statute. Regulators should avoid establishing static, prescriptive criteria that do not give lenders the ability to consider compensating factors in meeting the financing needs of qualified borrowers.
Such steep down payment requirements would severely impair access to credit for all but the best-heeled borrowers. Qualified borrowers should not be unduly denied or have to pay more for credit for sustainable mortgage products.
Creating and establishing rules for the future of the real estate finance market is a complicated process that requires significant input from policymakers, industry leaders and consumer advocates. We applaud federal regulators for having an inclusive process, but further coordination among regulators, consumers and industry representatives is required to get these rules right and continue moving the housing recovery forward.
Demographic statistics show that the future growth of households in America is strong, with the Echo Boom generation (which is larger than the Baby Boom generation), now of home-buying age. Additionally, there are many first-time and lower- to middle- income families that may be considered qualified borrowers today that will be pushed out of the housing market with such high down payment requirements.
As we move forward creating a future real estate finance system, we should remember that safe and affordable fixed-rate financing for the average American family one just starting off with a low down-payment, a stable job and the simple desire to build a home must remain viable well into the future.
David H. Stevens is the president and CEO of the Mortgage Bankers Association.