Housing Leaders Cautious of Potential Strict Down Payment Requirements

By Daniel Duffield

Leaders in the real estate industry along with congressional lawmakers are cooperating in the attempt to adjust to new mortgage lending rules while avoiding the addition of strict down payment requirements on borrowers hoping to acquire home purchase mortgages.

Many bankers, real estate agents, home builders, and lawmakers received somewhat of a shock with President Obama’s State of the Union address emphasizing the idea that the new mortgage rules would primarily consider during qualification a borrower’s ability to repay the mortgage.

These professionals contend that flexibility is essential for mortgage lenders issuing loans that conform to the new qualified mortgage (QM) regulations, arguing that specific down payment requirements for the currently-being-developed qualified residential mortgage (QRM) would hinder many home purchases and exclude a great number of potential buyers.

According to Jerry Howard, president and CEO of the National Association of Home Builders (NAHB), a borrower’s ability to afford a mortgage should be evaluated by the whole, to which imposing down payment requirements is the “antithesis.”

Howard stated that, considering the tight lending environment within the mortgage market today, the president is sending the appropriate message. Any pending restrictions will inevitably start a “chill on the housing market,” and, “No matter what prevailing wind is seeming to blow at the back of the housing industry, regulators are in a position to key up the housing sector and play a huge role in the traditional spring season.”

Regulators aim to finalize the QRM policy sometime within 2013, though Howard and an increasing number of lawmakers are urging a faster solution that would potentially stabilize the housing market with a higher degree of certainty for real estate financing.

Bob Davis, executive vice president at the American Bankers Association (ABA), stated that the QM and the QRM should conform to identical borrower requirements, and that additional restrictions should not be imposed on the QRM policy.

Davis clarified that he also supports identical requirements for the mortgage rules due to the fact that the QM, which was completed in January, includes a wide range of consumer protections in addition to the added qualifications regarding borrowers’ ability to repay their loans.

For QM regulations, there is currently no rule for minimum down payments. Rather, according to Davis, lenders will assess the down payment amount based on a list of borrower qualification factors. Davis contends that a down payment requirement would harm those who would otherwise qualify but would not have sufficient up-front funds.

The issue involving this potential down payment requirement arose from a 2011 initial draft of the QRM rules that mandated a 20% down payment to be considered a QRM, with borrowers making less substantial down payments being classified as risky.

The authors of this preliminary QRM provision, Sens. Kay Hagan (D-N.C.), Mary Landrieu (D-La.), and Johnny Isakson (R-Ga.), have admitted that this provision represents a misinterpretation of the original intent of the law that could adversely affect the housing market recovery by excluding otherwise-qualified American borrowers.

Federal Reserve Board Governor Daniel Tarullo has expressed that his largest concern lies with the avoidance of restricting credit for borrowers within the middle and lower-middle classes by redundant down payment requirements for bad credit borrowers.

Mark Zandi, chief economist with Moody’s Analytics, also hopes that the QM and the QRM rules would be identical, which he believes would be a step toward “restarting the securitization market and an easing in credit standards.”

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