PhotoFederal regulators are currently debating how to define a "Qualified Residential Mortgage" (QRM) under the Dodd-Frank Act and what they decide may well determine whether you will ever be able to afford to buy a home, according to the Center for Responsible Lending (CRL).

Congress established the category of a Qualified Residential Mortgage in response to the housing meltdown. Unless the mortgage a lender originates meets the requirements of a QRM, the lender will be required to retain ownership of a portion of it.

Reasonable restrictions

Loans with risky product features such as high fees, balloon payments, low teaser rates or interest-only or negative amortization schedules will automatically be ineligible for QRM status, as will loans that do not verify borrower income. According to CRL, these are reasonable restrictions.

However, regulators are also considering imposing minimum down payment requirements as part of the QRM standard. Unless a homeowner has a large amount of cash to put down, such a requirement could make it harder to get a loan and qualify for a low rate.

"While much has been written on the barriers to homeownership that would result from the 20 percent down payment requirement included in regulators’ April 2011 proposed rule, there has been less commentary on a possible 10 percent down payment," CRL said in a brief, filed along with six other consumer and civil rights organizations.

A lot of cash

If a buyer were required to come up with 10 percent of the purchase price, the down payment on a home costing $189,000 would be $18,900. With fees and other closing costs the buyer could be looking at needing to raise $20,000 in order to make the purchase.

"The costs of imposing a mandatory 10 percent down payment are unacceptably high," CRL said. "Not only would such a requirement exclude creditworthy families from homeownership, but it also would undermine the nation’s economic recovery by further depressing the housing market."

But wait a minute, didn't lax lending standards, and allowing consumers to purchase homes they couldn't afford, get us into the housing mess in the first place? Yes, but CRL says loans with lower down payments are not the same as subprime loans, which often utilized low teaser rates before adjusting sharply higher.

Low down payments not the cause

It says the housing crisis was brought on by abusive loan terms and practices in the subprime and Alt-A mortgage markets, not low down payment loans. According to CRL, arbitrary minimum down payment requirements would lock middle-income families out of the mainstream market and widen the wealth disparities that already exist between whites and communities of color.

"Given median housing prices and incomes, it would take over 20 years for the average family to save a 10 percent down payment plus closing costs," the group said. "The barriers would be even greater for typical African-American and Latino families, for whom it would take 31 and 26 years, respectively, to save enough to meet such a requirement. Again, lending history has shown that many families who don’t have the funds for a significant down payment can become successful homeowners."

Realtors agree

The CRL stance puts the consumer group on the same page as the National Association of Realtors (NAR), which has been preaching that same message for years. NAR chief economist Lawrence Yun has said that if the mortgage industry simply returned to the lending standards that were in place years before the housing bubble, home sales would increase by 15 percent.

Looking at large sample of mortgages originated between 2000 and 2008, the CRL study shows that, after applying Dodd-Frank’s other mortgage protections, a 10 percent down payment requirement would have had a relatively small benefit in reducing defaults.

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