April 18, 2011
Nation's Building News

The Official Online Newspaper of NAHB

Economics and Finance
Minimum 20% Down a Danger to Home Buyers, Housing Recovery, Paper Says

With the proposed Qualified Residential Mortgage (QRM) rules recently proposed by federal regulators, “the government is throwing a devastating, unnecessary and very expensive wrench into the American dream,” according to a statement released last week by NAHB and five other groups.

Issued on April 14, the day prior to a hearing on the QRM regulations by the House Subcommittee on Capital Markets and Government Sponsored Enterprises, the white paper charged that the proposal would force credit-worthy borrowers to delay home purchases or pay higher mortgage rates, would impede a fragile housing recovery and would discourage the restoration of a healthy private lending market for home purchases.

In addition to NAHB, the groups that prepared the paper — “Proposed QRM Harms Creditworthy Borrowers and Housing Recovery” — included the Center for Responsible Lending, the Community Mortgage Banking Project, the Mortgage Bankers Association, the Mortgage Insurance Companies of America and the National Association of Realtors®.

The paper voiced particular concern over the minimum 20% downpayment required for a QRM.

(The QRM would exempt securitizers from having to retain 5% of the credit risk of each loan backing a security. For a related story in the April 4 issue of NBN, click here.)

Based on 2009 income and home price data, the paper says, it would take 14 years for the typical American family to save for a 20% downpayment and almost nine years to be able to put 10% down.

“Even 10% downpayments create significant barriers for borrowers, especially in higher-cost markets,” the paper says.

“This will significantly delay or deter aspirations for homeownership, or require first-time buyers to seek government-guaranteed loan programs or enter the non-QRM market, with higher interest rates and riskier product features.”

Existing home owners would also be harmed by the rules. Based on data from CoreLogic, nearly 25 million current home owners would be denied access to lower rate-QRMs to refinance their homes because they do not currently have 25% equity.

Further analysis of CoreLogic data, the paper says, demonstrates that sound underwriting and product features like documentation of income and type of mortgage have a larger impact on reducing default rates than high downpayments — a fact ignored by the narrowly drawn QRM that has been proposed.

CoreLogic statistics on loans originated between 2002 and 2008 show that “boosting downpayments in 5% increments has only a negligible impact on default rates, but it significantly reduces the pool of borrowers that would be eligible for the QRM standard,” according to the paper.

The paper finds that moving from a 5% to a 10% downpayment on loans that already meet strong underwriting and product standards reduces defaults by only two- or three-tenths of one percent. However, that increase would eliminate from 7% to 15% of borrowers from qualifying for a lower-rate QRM loan.

The paper notes that “Congress considered and rejected establishing high minimum downpayments because they are not a significant factor in reducing defaults compared to other underwriting and product features.

“In fact, the three sponsors of the QRM provision have sent letters to the regulators saying that they intentionally did not include downpayment requirements in the QRM.”

By impairing the ability of millions of households to qualify for low-cost financing, the report adds, the restrictive QRM that has been proposed could frustrate efforts to stabilize the housing market.

“Some private estimates have concluded that 5% risk retention could result in a three-percentage point rise in interest rates for loans funded through securitization,” the paper says. “In other words, today’s 5% market would become an 8% interest-rate market.”

Even if those estimates are too high, “even a one-percentage point increase in interest rates could be devastating to a fragile housing market,” the white paper says.

NAHB analysis shows that every one percentage point increase in mortgage rates prevents 4 million households from being able to qualify for the median-priced home. By that estimate, a three-percentage point increase would price out more than 12 million households.

The paper also says that the proposed QRM definition would make matters worse for those markets that have been hit the hardest by the housing crisis.

As the result of price declines in Nevada, Arizona, Georgia, Florida and Michigan, “at least two out of three home owners there do not have at least 25% equity in their homes that would allow them to refinance with a lower-rate QRM. Six out of 10 would not be able to move and put 20% down on their next home.”

As for the impact of the QRM rule on the mortgage market, the paper quotes mortgage securitization pioneer Lew Ranieri, who said: “The proposed very narrow QRM definition will allow very few potential home owners to qualify.

“As a result, it will complicate the withdrawal of the government’s guarantee of the mortgage market. I fear it will also delay the establishment of broad investor confidence necessary for the reestablishment of the residential mortgage-backed securities market.”

The paper also points out that “risk retention is a viable option only for the largest banking institutions that have balance sheets to handle it.

“In 2000, the top five lenders accounted for less than 29% of total mortgage originations. Today, just three FDIC-insured banks control nearly 55% of all single-family mortgage originations.

“By creating such a narrow QRM market, the proposed rule will reduce competition from community-based lenders and accelerate consolidation of the mortgage finance market. In short, the proposal creates real systemic risk, while doing little to relieve it.”

To read the entire white paper, click here.

For more information, email Steve Linville at NAHB, or call him at 800-368-5242 x88597.

Register for Spring Construction Forecast Webinar on April 27

The NAHB Spring Construction Forecast Webinar will provide attendees with up-to-the-minute analysis of the latest housing numbers and market trends right to their desktop. The webinar will be held from 2:00-4:00 p.m. EDT on Wednesday, April 27.

Speakers David Crowe, NAHB chief economist; Mark Zandi, chief economist with Moody's Analytics; and Robert Denk, NAHB’s assistant vice president for forecasting and analysis, will address issues affecting the housing industry and the economy — including competition from short sales and foreclosures, consumers' inability to sell their existing homes, appraisals coming in below construction costs, and restrictive lending conditions for buyers and builders — and how builder confidence and the market may evolve as those factors change.

The fee is $29.95 for NAHB members and home builders associations and $49.95 for non-members.

To Register

For more information and to register, visit www.nahb.org/cfw.

Subscribe to the Free Eye on Housing Blog

For in-depth analysis of the latest housing statistics and research from the federal government, NAHB and other sources, Eye on the Economy readers are encouraged to visit Eye on Housing at http://eyeonhousing.wordpress.com/.

They can also subscribe to the blog’s free RSS feed, which will automatically alert them to every new posting.

Data You Can Build On

Get historical data, industry analysis and the latest forecasts, including state and metro, from HousingEconomics.com. Support your business decisions with in-depth analyses, detailed Excel tables, overviews and more. For more information, visit HousingEconomics.com.

Also in This Issue