Mortgage downpayment rules attacked


It would take more than a decade for a typical American to save enough money for a 20% down payment.

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A broad coalition of Republican and Democrat politicians, as well as industry groups that often disagree with each other, today presented a united stance opposing a proposed regulation that would require a 20 percent down payment on many mortgage loans, saying such a hefty down payment would be disastrous for consumers and an already ailing housing market.

“It’s a remarkable coalition that has came together and is united on this issue,” Glen Corso, managing director of the Community Mortgage Banking Project, told InsideRealEstateNews, after hosting a press conference in Washington, D.C. this morning. “The coalition that came together includes consumer groups and civil rights group, as well as the mortgage industry groups that you would expect to be concerned about this. The fact that groups that are often at odds with each on other issues came together on this issues, show the magnitude of this proposed regulation and the level of concern people have with it.”

All told, 44 different groups are opposing the proposed mortgage lending regulation calling for at least a 20 percent down payment on what are known as Qualified Residential Mortgages, or QRMs. They were joined by politicians from both parties, who support QRMs, but oppose the 20 percent down payment on these loans. Earlier, proposed risk-retention regulations were going to require lenders to hold 5 percent of each loan in reserve – the idea if they had some “skin in the game,” they wouldn’t make so many bad loans, which led to the first nationwide housing crisis since the Great Depression. However, Corso’s group and others convinced legislators and regulators that QRMs, with low default rates, did not pose the kind of risk that required 5 percent reserves, so they were exempt from the risk-retention requirement.

But the 20 percent down payment proposal not only would dramatically hurt an already weak housing market, opponents of the proposal argue, but research shows if it had been in place in much of the past decade, it would have done almost nothing to avert the current crisis. An analysis of data shows even during the go-g0 days of bad loans, requiring such a huge down payment would have had a negligible impact on reducing foreclosures. Loans that led to the initial crisis, such as stated-income, or “liar loans,” are no longer being made.

Research also shows that it would take a typical American 10 years or more to save up for such a hefty down payment.

Bipartisan opposition

“We had a couple of Senators and two House members who said that we have got to the get the message across that with QRMs, the 20 percent down payment is not going to work,” Corso said. “Hopefully, the banking regulators have heard this message loud and clear. It is quite a powerful message that original Congressional sponsors of financial regulations are now saying that this is not what they intended.”

Politicians opposing the 20 percent down payment include:

  • Sen. Mary Landrieu, D-La.
  • Sen. Kay Hagan, D-NC
  • Sen. Johny Isakson, R-Ga.
  • Rep. John Campbell, R-Calif.
  • Rep. Brad Sherman, D-Calif.

Earlier, Congress considered and rejected a down payment requirement in the Dodd-Frank financial reform legislation because it determined that the cost of excluding responsible middle-class families would exceed the modest improvement in default rates.

“This is coming at a time when the housing industry is barely surviving,” Corso said. A housing recovery typically helps bring the nation out of a recession, so it is crucial that the housing economy gets back on its feet, he noted.

“The message is clear – regulators should go back to the drawing board on the proposed QRM rule,” Corso said.”Regulators should focus on good underwriting features, as outlined in the original statute, which are proven to reduce defaults. The concept that QRM was to be a small slice or segment of the market is a myth, as the prime Congressional sponsors of the QRM have made repeatedly clear to the regulators. Hopefully, the broad chorus of voices speaking out on this will put the myth to rest once and for all.”

Many can’t take advantage of historic low rates

Corso said that many people are already arguing that it is too difficult for people to get loans or refinance existing ones, making it almost impossible for many consumers to take advantage of mortgage rates that are still hovering near historic lows.

“If lenders required a 20 percent down payment, it would severely hamper a lender’s ability to provide low-cost mortgages to consumers,” Corso said. “It is just crazy. What we need are regulations that are well-designed and thought-out to prevent the kind of fiasco we had in the past.”

Peter Lansing, president of the Colorado Mortgage Lenders Association, agrees.

Lansing: Right kind of regulations needed

“I don’t think anyone is trying to stop regulations,” said Lansing, who also is president of Universal Lending, a sponsor of InsideRealEstateNews. But he said that one unintended consequence of the 20 percent down payment is that it would cause a stampede of borrowers to seek FHA-insured loans, which require a 3.5 percent down payment.  “Everyone would want to get an FHA loan at a time when the government says it wants to get out of guaranteeing loans.”

Also, he said it would take nine to 15 years or more for most Americans to save enough money for a 20 percent down payment. “And that is if all they were doing was saving to buy a house, and that is not how it works in America,” Lansing said.

Peter Lansing, shown addressing a conference, thinks regulators are going down the wrong path by considering a 20 percent down payment on qualified residential mortgages.

Corso said six regulator agencies will consider comments on the 20 percent down payment requirement until Aug. 1. They include:

  • The Federal Deposit Insurance Corp.
  • The Federal Reserve
  • The Comptroller of the Currency
  • The Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac.
  • The U.S. Department of Housing and Urban Development
  • The Securities and Exchange Commission

“After Aug. 1, the regulators will consider changes or revisions and they will likely issue the final regulations before the end of the year or early next year,” Corso said. “We need to keep the pressure on them.”

Do you support a 20 percent down payment for most home mortgages?

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Reduction in default rate by increasing down payments from 5% to 10%.0.2%0.1%0.3%0.3%0.2%0.5%0.2%
Proportion of borrowers not eligible for QRM at 10%.
Reduction in default rate by increasing down payment from 5% to 20%.0.6%0.3%0.7%0.8%0.8%1.6%0.6%
Proportion of borrowers not eligible for QRM at 20% down.19.2%16.7%23.0%22.9%25.2%28.2%20.7%

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John Rebchook

John Rebchook has more than 30 years of experience in writing and communications. As the Real Estate Editor for the Rocky Mountain News, he wrote about residential and commercial real estate for 26 years. He has won numerous awards for business stories and columns that he wrote, both as an individual and part of teams. In addition to real estate, he also covered economic development, banking and financing, the airlines, and cable TV for the Rocky. In addition, he was one of the original freelance writers for, covering commercial real estate for the Internet publication.

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