Congress Wants To Require You To Make a 20% Down Payment

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) became law on July 21, 2010. Section 941 of the Dodd-Frank Act requires financial institutions that securitize mortgages loans to retain at least 5 percent of the credit risk.

The Dodd-Frank Act, however, exempts from the risk-retention requirement securities backed exclusively by “qualified residential mortgages,” or QRMs—mortgages with underwriting and product features that historical loan performance data indicate result in a lower risk of default. By exempting QRMs from the risk-retention requirement, the cost of securitizing these mortgages is reduced, thus providing a market incentive for the wide origination of responsible loans.

Highlights of the Proposed QRM Standards

  • The proposed QRM rule would require an 80% LTV, which requires a 20% down payment.
  • The proposed rule would also limit the mortgage payment to 28% of gross income and limit all debt to 36%.
  • No credit score requirement is included, but a mortgage loan would qualify as a QRM only if the borrower is not currently 30 or more days past due on any debt obligation.
  • Borrowers could not have been 60 or more days past due on any debt obligation within the preceding 24 months.
  • Borrowers could not have, within the preceding 36 months, been through bankruptcy, been foreclosed on, engaged in a short sale or deed-in-lieu of foreclosure, or been subject to a Federal or State judgment for collection of any unpaid debt.

The QRM definition is of extraordinary importance for three reasons:

1. It will determine the types of mortgages that will be generally available for borrowers for the foreseeable future.

2. It will serve as a precursor for what the successor(s) to the current GSEs (Fannie Mae and Freddie Mac) are likely to be allowed to securitize.

3. Finally, the QRM proposal will telegraph the administration’s intentions for FHA. A narrow QRM will require severe tightening of FHA to prevent huge increases in FHA’s already robust market share.

The median sales price in Northern Virginia is $370,000 – a 20% down-payment means $74,000 PLUS closing costs (on average, another $11,000)…that puts homeownership out of the reach of many, many would-be buyers. Raising the required down-payment will stall economic growth and recovery.

Read the letter Realtors(R) are sending to our representatives, and feel free to copy it to send to yours.

Read the full bill: H.R. 4173: Dodd-Frank Wall Street Reform and Consumer Protection Act

One thought on “Congress Wants To Require You To Make a 20% Down Payment

  1. “Raising the required down-payment will stall economic growth and recovery.”

    Really? What evidence is there that economic growth will stall? Perhaps it will slow down, but what is wrong with Congress attempting to make securitized mortgage instruments less risky for the investors that essentially put the money into the economy that is available for lending? It seems to me that Congress is trying to trim the number of foreclosures hitting the market, which not only adversely affect home prices–but also ripples through the debt markets.

    Perhaps a different option would be to have tiered interest rates available to borrowers depending on how much they put down. Put down 3%? Sure, but here is your 10% mortgage rate. Put down 20%? Wonderful, here is your 5% mortgage rate. A similar system could be established and defined in such a way as to appropriately compensate lenders for the increased risk associated with purchasers that put little to no money down. I imagine a borrower in distress can more easily stomach walking away from the 3% they put down than the 20% they put down after years of diligent saving.

    Ownership is a privilege and not a right. Without lenders, ownership for many Americans would be virtually impossible.

    I understand the interest the National Association of Realtors has in getting the current QRM proposals killed. More buyers/sellers in the market equals more 6% commissions to split across the realtors in this country. Blindly supporting the association’s objectives, however, is perhaps a bit short-sighted. It is not just about buyers and sellers in the market. It is also about money being available to lend and that money being injected into the economy by willing investors. How many how closings will you attend if buyers are required to pay for the whole purchase in cash? I imagine it would not be that many.

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