Skip to comments.Minimum 20% Down to be Required? (Let's Reinflate the Bubble!!)
Posted on 06/30/2011 7:25:03 AM PDT by Notary Sojac
A bipartisan group of U.S. senators and representatives last week joined with NAHB and other business and consumer groups in calling on federal regulators to revise a pending proposal that would require a minimum 20% downpayment for qualified residential mortgages."
They argued that such a plan goes against the intent of Congress, would keep homeownership out of reach of most first-time home buyers and many middle-class households, and would deal a devastating body blow to the already fragile housing market.
This rule is an overreach. If left as is, it would make recovery in the housing market almost impossible, said Sen. Johnny Isakson (R-Ga.).
Isakson along with Sen. Kay Hagan (D-N.C.) and Reps. John Campbell (R-Calif.) and Brad Sherman (D-Calif.) on June 22 hosted a Capitol Hill press briefing in conjunction with the Coalition for Sensible Housing Policy, which is comprised of more than 40 industry and consumer groups, including NAHB, that are united in opposing the proposed 20% downpayment rule and share the goal of giving families access to affordable mortgages.
Sen. Mary Landrieu (D-La.), who has worked closely on this issue with Sens. Isakson and Hagan, was unable to attend the event.
Under the Dodd-Frank financial reform law passed last year, securitizers are required to have "skin in the game" by retaining 5% of the credit risk of each loan backing a security.
The law also called for federal banking regulators to establish rules for a qualified residential mortgage, or QRM, that would exempt lenders from the risk retention requirement.
Borrowers who can't afford to put 20% down on a home and who are unable to obtain FHA financing would be expected to pay an estimated premium of two percentage points for a loan in the private market to offset the increased risk to lenders, according to NAHB economists.
"This would annually disqualify about five million potential home buyers, resulting in 250,000 fewer home sales and 50,000 fewer new homes being built per year," said NAHB CEO Jerry Howard, who represented the association at the press event.
Such a drastic cutback would have a disproportionate impact on minorities and low-income families struggling to achieve the dream of homeownership, he said.
Lawmakers Omitted Downpayment Rule
Lawmakers have noted that nothing in the Dodd-Frank Act stipulated a downpayment rule for the QRM provision and they have expressed concern that the regulators did not follow the clear legislative intent behind the provision.
This misinterpretation of our intent could unnecessarily slow the housing markets recovery and prevent well-qualified, middle-class families from securing an affordable mortgage, said Hagan. We are urging regulators to go back to the drafting table.
Giving the issue a local perspective, Hagan said that in Raleigh, N.C., where the median house price is $217,000, home buyers would need more than $43,000 for a downpayment under the proposed rule.
Thats almost equal to the median annual income in my state, she said. Many families in North Carolina and across the country cannot afford such an onerous downpayment. In fact, according to the 2009 data from the Center for Responsible Lending, it would take the average American 14 years to come up with that 20% downpayment.
In a written press statement, Sen. Landrieu said that the proposed rule is inconsistent with the drafters legislative intent. As I have mentioned to the regulators on several occasions, we intentionally and explicitly omitted a downpayment requirement.
Lawmakers Write to the Regulators
Last month, Isakson, Landrieu and Hagan led a bipartisan group of 39 senators in writing a letter to federal regulators urging them to modify the proposed risk retention rule because it imposes unnecessarily tight downpayment constraints that would restrict credit to middle-class families working to own a home.
These restrictions unduly narrow the QRM definition and would unnecessarily increase consumer costs and reduce access to affordable credit, the letter said.
Well underwritten loans, regardless of downpayment, were not the cause of the mortgage crisis. The proposed regulation also establishes overly narrow debt-to-income guidelines that will preclude capable, creditworthy home buyers from access to affordable housing finance, it said.
Reps. Campbell and Sherman spearheaded a similar effort in the House, garnering a strong majority of lawmakers to join together to write a subsequent letter opposing the rule.
The qualified residential mortgage definition regulators have proposed is so restrictive it threatens to cut off millions of otherwise eligible consumers from the dream of owning a home and will drive the bulk of real estate lending in this country to the largest institutions that enjoy the lowest cost of capital, said Sherman.
Thats why Congressman Campbell and I persuaded over 280 of our House colleagues to sign a letter to regulators opposing the rule as it has been drafted, he said.
This economy cannot recover if housing does not recover. Its one-sixth of the economy, added Campbell.
If this regulation as proposed goes into effect, we not only wont have a strong housing market, well have a weaker one. We cannot set up a system that is so onerous and so difficult that the average American wont be able to get financing to buy a house, which will further drop the price of housing and will further sink this economy, he said.
Coinciding with the news conference, joint letters from 44 senators and 282 members of the House of Representatives have been sent to the federal regulators.
Weighing in on the Issue
NAHB has strongly weighed in on this matter as a member of the Coalition for Sensible Housing Policy and in testimony before Congress, urging regulators to come up with a fairer QRM definition that does not unduly impact credit-qualified home buyers.
On June 22, the coalition also submitted a white paper to regulators as a joint comment letter.
The 44 organizations that signed on to the white paper are calling on regulators to redesign a QRM that comports with congressional intent: encourage sound lending behaviors that support a housing recovery, attract private capital and reduce future defaults without punishing responsible borrowers and lenders.
Federal regulators recently extended the comment period for the 20% downpayment rule until Aug. 1. In their announcement, the agencies cited "the complexity of the rulemaking" and the need "to allow interested persons additional time to analyze the proposed rules."
NAHB is currently drafting comments for submission ahead of the new deadline.
I especially love Senator Hagan...
Thats almost equal to the median annual income in my state, she said. Many families in North Carolina and across the country cannot afford such an onerous down payment."
Well then, the PRICES NEED TO COME DOWN OR THE INCOMES NEED TO COME UP, YOU BRAIN DEAD D-BAG.
A bipartisan group of U.S. senators and representatives wants to repeat bad history. What is wrong with people taking out loans with a little more of their own skin in the game? For that matter, what’s wrong with letting the lending institutions decide for themselves who does or does not qualify for a home loan?
1. Get rid of Fannie May.
2. Make a multi-tiered system for credit/down prequalification.
720+ credit = 5% down, low rate
650-720 = 7% down, low-mid rate
600-650 = 10% down, mid rate
-600 = 20%down, mid rate
Compel people into higher credit scores. FDA loans, however, are very easy to get and will probably make this useless anyway.
Let the banks/lenders decide the terms of the loans...
does that make too much sense?
I know it takes power out of the hands of the central planners, so that’s why they oppose it,
but, it would let the market work, and those lenders who were either too tight or loose with their standards would suffer the market consequences of those policies.
“Bad laws are the worst sort of tyranny.” Edmund Burke
Enabling immature, lazy and greedy people does not work. It is basically how we got into THIS jackpot!
What ever happened to waiting until you can afford something before you buy it? What ever happened to living withing you means?
But a return to market prices will bankrupt a lot of politically inconvenient institutions and individuals, therefore this sort of stealth bailout will continue to dominate the headlines.
Yes, exactly. Home prices are still over-inflated, since the Government did not allow a natural price correction to take place. 20% down should be affordable for the average couple with a few year’s savings, but it’s not if a home worth 200k is selling for 600k.
To reduce a downpayment (under those terms) just $1 you have to reduce the price $5, right? (For a $100,000 home, the downpayment requirement would be $20,000. To reduce that downpayment to a mere $19,999, you would need to reprice the property to $99,995.
One does presume VA loan guarantees will continue to be free of a mandatory downpayment ~ or not?
“They argued that such a plan goes against the intent of Congress, would keep homeownership out of reach of most first-time home buyers and many middle-class households, and would deal a devastating body blow to the already fragile housing market. “
So we’re back to home ownership being some sort of right that congress needs to help bring about in any way they can? Tell you one thing. They all believe they have to reduce FNM/FRE exposure so by saying less than 20% down they are implying they want banks to take more risk.
Not sure where you get the idea there hasn’t been a “natural price correction”? Even in the best market in the country (Washington DC metro area), everybody took a 35% to 50% bath ~ and there are only a few places where prices have climbed “back up” (and that has to do with unusual conditions ~ near or around Fort Belvoir or subway stations.)
It’s not the government’s place to be specifying a mandatory down payment percentage in the first place. Let the banks set their policies according to the amount of risk they’re willing to accept. And then if they accept too much, don’t use any of our money to bail them out.
Hubby and I are going to try to build our dream home and to finance as little as possible. How?
- We’re going to scrape and save
- We’re going to pay cash for land in a depressed market
- We’re going to finance the actual house build, but we’ll put a *minimum* of 20% down for a 15 year note. The house will be bare-bones with nothing fancy.
- We’re going to pay cash to put in all the extras - one room at a time - over the first two years after the structure is built. (This includes electronics and furniture)
It’ll take us four or five more years to save enough to get started, one year to build the house and two to finish it. When it’s all said and done, in eight years we’ll have a show-case retirement house and a very tiny mortgage.
In the mean-time, we’ve got an investment property. I’m hoping that, after things turn around, we’ll have enough equity to pay off the new house’s mortgage just a couple of years after getting it.
I don’t want to be paying on a mortgage when we’re in retirement. That’s insane.
If my CURRENT disposable income cannot pay for the property within ten years including interest and taxes and I cannot afford to pay down at least 25%, I shouldn't buy the property.
Congress critters call such unworkable. I call such mandatory. My properties are paid for in full (all of them) I have never even come close to defaulting on a property loan.
Maybe Congress should rethink their idiot proposals!
The industry should regulate itself and 20% down should be about the minimum. Otherwise History is Doomed to Repeat Itself!
Your credit rating agencies began spitting up puke left and right as a consequence ~ I haven't read anything that says they are back in business with truly reliable information. Most folks would be well advised to check their ratings and start chipping away at the screwy stuff that's been entered on their records.
A 20% down payment requirement is certainly reasonable but not if the government makes the requirement. The government is incompetent and/or destructive when it interferes in the market.
Oh, I’m not disputing that 20% down is prudent nowadays (and I’m saying this as a lifelong renter with bad credit that, given current tight credit, will probably never own a home). I’m just saying that it’s not Washington’s place to force banks to require it. If a bank wants to step out on the ledge and get back into the “subprime” loan business or loosen down payment requirements, that’s their business as long as the taxpayer isn’t on the hook if they screw it up.
By law? Negative...the banks can create their own rules.
Not everyone is cut out to own property - even when you give it to them basically for free.
What a coincidence, Johnny Isakson made a fortune as a realtor.
I'm fine with the free market determining the terms for loans if the lender eats any losses rather than selling the loans to Freddie/Fannie or coming to the taxpayer for a bailout.
It's because we have not yet thoroughly purged the idea of "too big to fail" from our culture that we have the government setting these requirements.
see my post 22 above
The market stopped working the day that Henry Paulson went on his knees in front of Nancy Pelosi, begging for $800 billion so his buds wouldn't have to face the consequences of their imprudent decisions.
It has not been restarted since.
This economy cannot recover if housing does not recover. Its one-sixth of the economy,
Driving housing prices down even further than current would not be helpful.
Maybe, and I know this is a crazy idea, we should let lenders determine the acceptable level of risk when writing mortgages and other loans.
FICO is too sensitive to perfect timing of payment history and small nonpayments (many of which are disputable). You can have a good FICO and still get in way over your head with a loan.
Debt to income ratio (no more than 3:1 including the loan), employment history, and accurate valuation of the property ("recent comparable sales" are what gave us the bubble, I much prefer "no more than 120x monthly rents for comparable residences") are what say "good risk" to me.
Congress shouldn’t be making any regulations dictating down payments. Minimum or max. They need to stay ouit of it
Anyone should be free to make any loan they want to anyone else at any terms which are mutually agreeable, as long as the lender is at full risk (not one penny from the taxpayers!) if that loan is not repaid.
Personally I have no confidence, NO confidence, in the ability of our government (whether Democrat or Republican) to resist the calls for a bailout of the TBTF's when the next phony crisis comes along.
So the fewer loans that get made, the fewer bad loans I'll eventually get saddled with as a taxpayer.
I agree. But also, I do not think a first time home buyer should be expected to be able to afford a MEDIAN priced home.
I would expect most of us here in freeperland bought a cheap house for our first place, and worked up from there.
By quoting the 20% downpayment for the median priced home the congress critters are intentionally misrepresenting the effect on the first time buyers.
see posts 22 and 29
If you get something for nothing down, you lose nothing if you walk away.
And speaking of default rates, blacks have a much higher default rate than other categories of borrowers, meaning that they were not being held to a higher standard, they were being held to a lower standard.
They used to.
Then young lawyers, fresh out of college, like Barry Obama, took the banks to court on the basis that 20% down was racist.
Well, after all, it is a Constitutional right. You can find it in the Constitution right under the guaranteed right to kill any babies you don't want.
You base a loan on a persons ability to repay it not on some BS score from some credit bureau. Lets face it if you can’t afford to repay the loan you shouldn’t be given one to begin with and that’s been the problem.
Banks have been lending to very high risk individuals simply because the loans have been backed by bad government programs.
Common sense goes along ways. That’s why government programs don’t use it.
The average house back then was about 1200 square feet. Those same houses are going for 2-3 times average income in my area.
The problem is that the people who can afford a 1200 square foot house are trying to buy 2500 square foot houses.
Some folks just can’t afford 20%, 10% or even 5% down no matter how long they save but they can afford to make a house payment.
Banks should base a loan on ability to repay not by the size of the down payment. A large down payment DOES NOT guarantee the loan will be repaid and that’s been proven over and over.
Because now the banks are being OVERLY restrictive on lending, and the result is prices for rentals is skyrocketing. My counter question is: why are you in favor of the government setting the down payment requirement - should that not be a free market outcome?
As soon as I read the headline I knew Isakson would be wormed in there somehow. He's not a Senator, he's a real estate agent lobbying from the inside. Worst of the seven candidates for the seat in 2004 and not getting any better.
See posts 22 and 29. If I truly believed that the government would have the cojones to say no the next time Wall Street pulls a Chicken Little like they did in 2008, I would entirely agree with you.
Banks have been reckless...which is kind of funny. My credit rating is pure gold. When I bought my VERY modest home about 10 years ago, I had a 20%+ downpayment and the bank acted like they were going to do me a favor accepting my loan app. I had to jump through my own rectum to meet their qualifications (even with my perfect credit history) all the time they were handing out liar loans like popcorn to 'others'
I remember watching all the HGTV shows in 2005-2006 with the twenty somethings who were “approved for $600K” and the realtor asking “Well, can you stretch your budget a little more”?
Which is precisely why the Chrysler Bailout in the 70s was such a bad move, for it set up the precedent that government was responsible for stopping companies from failing...I don't care if Chrysler paid back the money with interest early, it set a horrible precedent.
IMHO 5% is too low but 20% is too high for many especially if theaverage market price is over $200K like it is in many markets.I think somewhere between would work best and not kill the market further.
IMHO 5% is too low but 20% is too high for many especially if the average market price is over $200K like it is in many markets.I think somewhere between would work best and not kill the market further.
Now that is a good idea but I think somehow they would manage to label it racist even though there is nothing about a credit score that has anything to do with that.It’s all about how well you pay your bills.
PRICES NEED TO COME DOWN OR THE INCOMES NEED TO COME UP...”
IMO, not everyone needs to or should be a homeowner. Bought a home 4 years ago and paid more than 20% down. But then I live in Texas where you can generally find a reasonably priced home where you can live within your means. Lot of people don’t think about the additional cost for maintenance, utilities, taxes, etc. Many are just not willing to begin with a starter home and WORK their way up.
No, allowing the market to set the terms of loans makes perfect sense.
However... you and I, as taxpayers, should not be funding the buying of speculative mortgages written with absurd LTV’s through Fannie/Freddie/FHA/etc.
The regulation(s) should be set to require that loans to be purchased in the secondary market by Fannie/Freddie/FHA/etc require a 20% down payment. If a bank wants to write a note with a higher LTV ratio, then they can. They just can’t sell the note to the taxpayer-backed secondary market.
Correct, but it DOES increase the homeowner's incentive to make those payments. As such, it discourages people from taking out loans they cannot afford, otherwise thinking that the government will bail them out.