Will The Federal Government Prevent A Housing Recovery?

A coalition of consumer and industry groups is warning the Obama Administration that its new risk retention regulations have the potential to “make a near-term housing recovery almost impossible.”

The concern is over how much a potential homebuyer would have to put down in order to receive financing. A federal interagency working group with responsibility for implementing the regulation is considering a high down-payment requirement for loans deemed to fall within the definition of “qualified residential mortgage” (QRM).

Mortgages that fall within the QRM definition are exempt from onerous risk retention requirements imposed by the newly enacted Dodd-Frank Wall Street reform legislation. The coalition, which includes the Center for Responsible Lending, Consumer Federation of America, National Association of Realtors and National Federation of Homebuilders, believes the policy under consideration will effectively slam the door on millions of potential buyers.

Hard to save for a down payment

“If the regulators impose a 20% -- or even a 10% -- minimum down-payment requirement as part of the new QRM framework, hundreds of thousands of creditworthy households will be excluded from homeownership because of the dramatic increase in the wealth required to purchase a home,” the coalition said in a letter to top federal policymakers. 

The coalition points out that saving the necessary down-payment has always been the principal obstacle to buyers seeking to purchase their first home, particularly as homes have grown more expensive relative to incomes.   

Even with a substantial savings commitment ($3,000 per year), it would take a typical median income family (2009 real median household income in the U.S. was $49,777) 14 years to accumulate the cash needed to purchase a home with a 20% down-payment on a median priced home, assuming closing costs of 5 percent of home price.  With a 10 percent down-payment requirement, it would take nine years. 

Assumes a high savings rate

“This assumes a saving rate in excess of the current rate of 5.8%, one of the highest savings rates since the early 1990s,” the coalition wrote.   “A high minimum down-payment requirement in the QRM will raise the cost of purchasing or refinancing homes unnecessarily and many will simply be priced out of the process—especially first time homebuyers who play an important role in a healthy housing market.” 

The groups in the coalition said the belief that the QRM definition should conform more closely to Congressional intent by taking into account several key factors that have a real impact on loan performance.

These include strong documentation, income to support the monthly payment for the life of the loan, reasonable total debt servicing loads, protections from payment shock, and prohibitions on high-risk loan features, among others.