Senators say down-payment requirement not their intent for housing finance law

April 11, 2011

Senators involved in writing part of a broad financial overhaul measure say they are dismayed that the Obama administration proposes carrying out their plan by pushing home buyers to come up with hefty sums of cash at the closing table.

The legislation, enacted last year, required banks that pool mortgages and sell them as securities to retain at least a 5 percent stake in those loans. The idea was that banks should have some “skin in the game” instead of selling off the loans and hence avoiding losses should the loans go bad.

At the time, a group of senators — led by Sens. Johnny Isakson (R-Ga.), Mary Landrieu (D-La.) and Kay Hagan (D-N.C.) — successfully pushed to carve out exceptions for certain types of relatively safe mortgages. They left it up to regulators to determine which loans should be exempt.

But the proposal that regulators unveiled last month surprised the lawmakers.

“This is not at all what we intended,” Isakson said in an interview Monday.

Under the plan, mortgages with a 20 percent down payment were deemed safe. That means banks would have to retain a stake in loans with smaller down payments, a costly requirement that the industry said it would pass on to borrowers in the form of higher interest rates and fees.

Isakson, who owned a realty brokerage for three decades, said that lawmakers debated but intentionally rejected imposing a minimum down payment requirement for fear of locking millions of creditworthy borrowers out of the housing market.

Instead, Congress instructed the regulators to consider other factors such as a borrower’s debt, his or her ability to repay the loan, and the features of the loan itself when deciding which loans to exclude from the risk-retention provision, the senators said.

But by raising the 20-percent-down issue, regulators strayed from the intent of the law, said Hagan, whose state includes large mortgage insurance firms. Many lenders require borrowers to pay private mortgage insurance if they put down less than 20 percent. In a letter to regulators, the senators said loans with that kind of insurance result in lower losses for lenders and fewer foreclosures than similar loans that lack insurance.

“I was definitely surprised and disappointed,” said Hagan, who passed the message along to Treasury Department officials in a recent meeting.

Last year, six out of 10 borrowers in the United States put less than 20 percent down, according to LPS Applied Analytics. In sections of the pricey Washington market, nearly all borrowers put down less than 20 percent — including about 86 percent of borrowers in Prince George’s County and 80 percent in Prince William County.

The federal proposal acknowledges that many creditworthy borrowers will have trouble coming up with 20 percent. In seeking public comment, regulators asked whether the level should be set at 10 percent instead.

But members of the Congressional Black Caucus said that even a 10 percent minimum would not be good enough. In a letter to regulators last week, they said the proposal would hurt low- and moderate-income families.

“Instead of allowing creditworthy individuals to participate in the American dream of homeownership, a 20 percent — or even a 10 percent — minimum down-payment requirement could relegate them to long term rental status” and draw out the housing crisis, Rep. Emanuel Cleaver II (D-Mo.), the caucus chairman, said in the letter.

The agencies will be collecting public comment on the proposal through June. Some low-down-payment loans would still be available without the higher rates and fees through federal programs such as those offered by Fannie Mae, Freddie Mac and the Federal Housing Administration. But the administration has said it wants to eliminate Fannie and Freddie eventually and to shrink the FHA’s role.

Until the rule is finalized, though, “the regulators have not heard the last of me,” Isakson said.

Dina ElBoghdady covers housing policy for The Washington Post.
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