Ever since the advent of the Dodd-Frank Act, the ugly spectre of a 30% downpayment requirement has been haunting the housing and mortgage industry.
It all started with the best of intentions. In an effort to discourage risky underwriting, a term of the Dodd Frank Bill requires mortgage companies that package their loans in to securities to hold five percent of the risk for any mortgages that don't meet the "Qualified Residential Mortgage" (QRM) requirements (read low risk loans).
The problem lies in regulators attempts to define what this low risk category should look like. The original idea was it would include full documentation loans with reasonable debt to income ratios made to borrowers with reasonably strong credit scores, which sounds....reasonable.
However, when it comes to downpayment requirements, regulators keep veering off the path of reason. Two years ago the proposal championed by members of the big 5, and being given serious consideration by regulators, was for 30% down. That proposal caused the real estate and mortgage banking industries and housing advocacy groups to shriek like the audience at a screening of Halloween so the proposed amount was reduced to 20% (still too high but better than 30%)
and discussions amongst the six regulatory agencies - the Federal Reserve Board, the FDIC, the Federal Housing Finance Agency, the Department of Housing and Urban Development, the Office of the Comptroller Of The Currency and the Securities and Exchange Commission - continued.
Then all was calm, nothing frightening happened for a while. In fact, just a few months ago there were victory celebrations as reports filtered out that the Regulators had discarded the proposed rule that would require a 20% downpayment in order for a loan to meet the QRM requirements. The monster had been slain.
Ahh, but not so fast, the victory celebrations may have been premature. In true horror movie fashion, it appears the monster is about to rise from the dead as the Regulatory Agencies are now touting an alternative, QRM-Plus, that goes back to the 30% down requirement.
Although the original intent of the legislation was to protect consumers from risky lending practices, the addition of such an onerous downpayment requirement will squeeze most moderate income home buyers out of the market.
Think about it! In order to buy a modest $200,000 home, you would need a $60,000 down payment plus money for closing costs. Do you have that kind of cash available to you?
Borrowers who could not meet the downpayment requirement would either be forced to pay higher rates which would lower their borrowing capability and therefore their buying power or would not be able to buy at all. In fact, the Mortgage Banker's Association estimates that only 18% of the people who purchased homes in 2012 would have been able to do so under this alternative.
If this is the alternative that is chosen it will take effect on January 1, 2014!
However, there is still hope, the Regulatory Agencies are taking public comments until October 30th. So grab your stake and follow this link http://www.regulations.gov/#!submitComment;D=HUD-2013-0090-0001 to leave your comments. Perhaps we can slay this monster yet!