"Qualified Residential Mortgages" - The Negative Impact of a Government Mandated 10Percent Down Payment

by 31 Aug 2012

(responsiblelending.org) -- Federal regulators are currently debating how to define “Qualified Residential Mortgages” (QRMs), acategory of home loans established by the Dodd-Frank Wall Street Reform and Consumer Protection  Act of 2010. Under Dodd-Frank, mortgage lenders that sell their loans into the private secondary market must retain a portion of the loan’s risk unless the loan is designated as a QRM. Because lenders are strongly motivated to avoid future costs on loans they originate, the QRM standard will have enormous implications for the cost and availability of mortgages. Loans that fall outside the QRM parameters (i.e., “non-QRM loans”) will likely be significantly more expensive than QRM loans. Estimates of the spread range from 80 to 400 basis points, depending in part on what happens with other parts of the risk retention rule. It is imperative that federal regulators create a QRM standard that balances the need to rein in dangerous loan features with fair access to safe, affordable loans for creditworthy borrowers.

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 (so-called “no-doc” or “low-doc” loans). The Center for Responsible Lending (CRL) supports these restrictions.

However, regulators are also considering imposing minimum down payment requirements as part of the QRM standard. 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.

The costs of imposing a mandatory 10 percent down payment are unacceptably high. 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. Consider these facts:

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