The average American would have to save for 14 years to accumulate the downpayment to buy a home under new rules proposed by federal bank regulators hoping to protect investors from another mortgage crisis.
The rules interpret the Dodd-Frank bank overhaul legislation passed last year. At issue is a proposal that defines home buyers who have a downpayment of less than 20% as “high risk.” Entities who sell mortgages for securities will have to keep 5% of the credit risk—unless the loan is a “qualified residential mortgage” (QRM), a change experts say would mean higher interest rates and fees for home buyers who don’t have 20% downpayments and borrowers who spend more than 28% of their gross income on mortgage payments.
Requiring high downpayments won’t have a meaningful effect on mortgage default rates, but will prevent many families from buying homes, according to research by the NATIONAL ASSOCIATION OF REALTORS®.
The key things preventing mortgage troubles are a reasonable and affordable downpayment, coupled with quality credit standards, strong proof of household income and expenses, and sound underwriting, NAR says.
“Saving the necessary downpayment has always been the principal obstacle to buyers seeking to purchase their first home,” said NAR President Ron Phipps said at the group’s legislative conference in Washington, D.C., last week. “Proposals that require high downpayments will only drive more borrowers to FHA, increase costs for borrowers by raising interest rates and fees, and effectively price many eligible borrowers out of the housing market.”
Another speaker at the conference, Phillip L. Schulman, a partner in the Washington, D.C., law firm of K & L Gates, predicted the QRM rule wouldn’t just affect buyers, but would also affect the ability of home owners to sell their homes, since there would be fewer buyers who could qualify for home ownership.
According to NAR Research, 60% of recent home buyers made less than a 20% downpayment, and it would take 14 years for a typical person to save up a 20% downpayment to buy a median-priced home.
NAR wants federal regulators to create a QRM exemption that includes a wide variety of traditionally safe, well-underwritten products such as 30-, 15-, and 10-year fixed-rate loans; 7-1 and 5-1 ARMs; and loans with downpayments of 5% to 20% with mortgage insurance, where required, and with other features found in low-risk loans such as no prepayment penalties or balloon payments.
“The definition of QRM is important because it will determine the types of mortgages that will generally be available to borrowers in the future,” said Phipps. “Borrowers with less than 20% down will have to choose between higher fees and rates today, up to 3% more, or a 9-14 year delay while they save up the necessary downpayment.”