Community News

The real estate market recovery is always forefront in our industry as well as the American consumer. It seems that on a weekly if not daily basis there is some national real estate statistic that makes the headlines, including new home sales, existing home sales, median and average sales price, current interest rates, foreclosures, and short sales data. We continue to look at these indicators for signs of the market bottom and stability.  It is becoming more apparent that each individual market has its own set of circumstances and recovery pace. However, there are national issues and regulations that will affect the market as a whole both in the short term and long term. One example with far-reaching implications is the Qualified Residential Mortgage (QRM) exemption section of the Dodd-Frank Act. 

As of July 21, 2010, the Dodd-Frank Act became law. This act mandates that lenders who secure mortgage loans retain a minimum of 5 percent of the value of the loans that they originate. An exemption in the act exists for QRMs which are identified as having a lower default risk. Six federal agencies recently released their proposed rules on QRMs with the public comment period ending August 1. There is strong industry-wide concern about the effects of the proposed regulation on consumers, the housing market, and the economy. The “Coalition for Sensible Housing Policy”, is a diverse coalition of 44 consumer organizations including the National Association of REALTORS (NAR), the American Bankers Association, civil rights groups, lenders, real estate professionals, insurers, and local governments, has joined together to publish a white paper highlighting some of the ramifications of the proposed rules.  The complete document is available at http://www.sensiblehousingpolicy.org. 

Some of the key points of the proposed QRM standards as found on www.realtor.org are as follows:
•    The proposed QRM rule would require an 80% LTV, which requires a 20% down payment.
•    The proposed rule would also limit the mortgage payment to 28% of gross income and limit all debt to 36%.
•    No credit score requirement is included, but a mortgage loan would qualify as a QRM only if the borrower is not currently 30 or more days past due on any debt obligation.
•    Borrowers could not have been 60 or more days past due on any debt obligation within the preceding 24 months.
•    Borrowers could not have, within the preceding 36 months, been through bankruptcy, been foreclosed on, engaged in a short sale or deed-in-lieu of foreclosure, or been subject to a Federal or State judgment for collection of any unpaid debt. 

The thought process behind the requirement of a 20 percent minimum down payment for a residential loan is due to the belief that the risk of default is closely related to the loan-to-value (LTV) ratio. This 20 percent amount only applies to mortgages that are included in securities and therefore sold to investors, not all residential mortgages.  It would be a lender’s decision.  For mortgages that have less than 20 percent down, the lenders are required to retain the 5 percent loan value.

Arguments exist over how much correlation there truly is between the size of the downpayment and loan performance. It is intuitive that putting down any amount of money to purchase a home is a very positive move. However, once the hard data is analyzed, there is only a slight improvement noted in the performance of loans. For instance, when comparing loans made between 2002 and 2008, when the down payment increased from 5 percent to 10 percent, the reduction in the default rate ranged between 0.1 percent to 0.5 percent. Yet by increasing the down payment to that 10 percent level, the proportion of borrowers who would not be eligible for QRM would range from 6.6 percent to 14.7 percent. That is a significant decrease in home sales. There is a slightly larger improvement in loan performance noted (ranging from 0.3 percent to 1.6 percent) when the down payment increases from 5 percent to 20 percent, but this also comes with the shrinking of market sales anywhere from 6.7 percent to 28.8 percent.

By having such hard and fast rules to make small performance increases, a large number of would-be homebuyers will be kept out of the market. Saving a 20 percent down payment is not an easy task, but the Dodd-Frank Act is proposing that it would help prevent homebuyers from getting into mortgages they truly can’t afford. The NAR’s “Profile of Home Buyers and Sellers” reported that in 2010, the average first-time homebuyer financed 96 percent of their mortgage, while the average repeat buyer financed 86 percent. Furthermore, 14 percent of all buyers financed 100 percent of their purchase. NAR and other organizations contend that increased down payments are not as instrumental to positive loan performance as sound underwriting from the beginning.