fter a disaster, people often want to figure out how to avoid the debacle again.
As we continue to deal with the fallout from the housing crisis, regulators working under the Dodd-Frank Wall Street Reform and Consumer Protection Act are proposing rules to prevent folks from getting into homes they can’t afford. One would require borrowers to come up with a 20 percent down payment. If they don’t meet this threshold, their loans would be considered more risky. It would not be a “qualified residential mortgage,” or QRM, and therefore the bank would charge more for it.
“Why, in a law intended to fix the mistakes that caused the credit crisis, would you mandate a certain down payment when low down payments were not the problem?” said Kathleen Day, spokeswoman for the Center for Responsible Lending.
I’m wondering the same thing.
In 2000, I met Agnes Howard, 81, who was in poor health and deeply in debt. She had lived in her home in the District for 46 years. Thanks to a shifty lender, this elderly woman was persuaded to refinance her house several times to help pay off some of her credit-card debt. She was assured that by refinancing she would reduce her monthly mortgage payments and interest charges. Instead, the retired government worker saw her monthly mortgage payment go from $132 to more than $1,300. Her income was just $1,700 a month.
A lot of major factors contributed to loan defaults, but the lack of hefty down payments was not one of them. Rather, it was making loans to people who had little or no chance to pay their mortgages.
From 1990 to 2009, about 27 million mortgages were made with low down payments that did not carry the risky features found in subprime loans, according to the Center for Responsible Lending.
Under the proposed rule, borrowers who cannot afford a 20 percent down payment and who are unable to obtain financing through the FHA will be expected to pay a premium of two percentage points for a loan in the private market to offset the increased risk to lenders, according to National Association of Home Builders.
“This sledgehammer approach to restore the health of the mortgage markets makes no sense,” said Bob Nielsen, chairman of the NAHB, when the QRM rules were released.
Like so many others, I want to be sure that our government fixes whatever broke the housing market. But if borrowers have to wait to save up a 20 percent down payment to qualify for the best mortgage deal, we will be putting homeownership out of the reach of a lot of people, particularly low- to middle-income borrowers.
The proposed rule will create a “class of newly designated high-risk borrowers, formerly known as the responsible middle-class borrower,” said Marc H. Morial, president and chief executive of the National Urban League, in a letter to the six agencies charged with developing new mortgage regulations.
It would take more than a decade for the median American family to save enough for a 20 percent down payment on even a modest home, according to the National Association of Realtors.
Last year, an average first-time home buyer financed 96 percent of a mortgage, according to the association’s “Profile of Home Buyers and Sellers.” The average repeat buyer financed 86 percent, and 14 percent of all buyers (first-time and repeat) took out a mortgage for the entire purchase price.
But let’s say the 20 percent down payment requirement were reduced to 10 percent. It would still shut out too many folks, Day said.
If a household earning the median annual income of $47,777 (based on the latest data from the Census Bureau) did nothing but save for a 10 percent down payment plus 5 percent in closing costs, it would take 13 years to accumulate enough money — assuming the borrower had saved about 5 percent of his after-tax income — to buy a home with a U.S. median sales price of $173,333, according to calculations by the Center for Responsible Lending.
The wait for homeownership would be much longer for minorities. For Latino households earning the median income of $38,039, it would take 15 years. For an African American household with a median income of $32,584, it would take about 18 years.
We won’t stop a repeat of the housing crisis and predatory lending by making creditworthy people wait a decade or two before they can save enough to get the best mortgages. We stop it by putting in place rules that prevent what happened to borrowers such as Howard, who should have never gotten a loan in the first place.
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