PSA announcement from your local Realtor: QRM rule bad for everybody

[88GT]

You may not have heard much about it lately, but federal regulators are proposing a rule that mandates a 20% down payment for all loans under the Qualified Residential Mortgage (QRM) umbrella. This is not a universal standard, but the devil is in the details.

This is bad for everyone in every way. The comment period ends August 1, so there are only a few days left to make your voice heard. This is not a piece of legislation. This is a regulatory rule proposal. Regardless of you position on the personal wisdom of how much to put down on a home, mandating a 20% down payment will be detrimental to the housing market (depressing home values even more, making the overall costs more expensive, and further crying up credit which dries up capital which is used to grow businesses) and further cripple the economy.

The National Association of Realtors has provided an online vehicle for you to provide comments here: https://secure.homeowneraction.org/...anner&utm_content=narpub&utm_campaign=qrm2011



And for more information, here are a few links I dug up.

http://www.caionline.org/govt/news/Political HeadsUp Public Document Library/QRM FAQ.pdf

QRM rule matters as much as Fannie and Freddie. - By Bethany McLean - Slate Magazine

Proposed QRM Rule Released 20 Down Payment Required | Mortgage Rates & Trends: Mortgage Blog

Proposed 20% down payment rule could put owning a home out of reach for many - The Washington Post

 

[Indy_Guy_77]

I personally don't think that the GOVERNMENT should mandate this. *

I think it should be up to the specific lender.

*If the lender is originating a loan using ANY federal monies at all, then, as a taxpayer, I want a 20% down payment.

-J-

 

[88GT]

I personally don't think that the GOVERNMENT should mandate this. *

I think it should be up to the specific lender.

*If the lender is originating a loan using ANY federal monies at all, then, as a taxpayer, I want a 20% down payment.

-J-

Did you read the part where it said that the amount of the down payment was not a factor in the risk of default? It's a non-issue. A red herring. It won't change default rates and will only undercut the economy.

ETA: federal money is not used to originate any loans.

 

[JCAJR30]

seems like if a person has a 20% DP then

 

[JCAJR30]

1. they are invested in the property and will therefore make more of an effort to make good on their loan
2. They can afford the bill

** I dont agree with gov't mandates/regulations. I would rather see the lender decide who they laon money too and why...

 

[IndySSD]

Did you read the part where it said that the amount of the down payment was not a factor in the risk of default? It's a non-issue. A red herring. It won't change default rates and will only undercut the economy.

ETA: federal money is not used to originate any loans.

I agree and disagree with you.

1. People need to read your post and realize what you said... this is a regulation between lenders, not a law.

2. I believe people with more of a vested interest in a property will be less likely to default on the remainder of the loan.

3. This "regulation" smacks of insincerity.... Almost seems like the lenders believe as you do, that percentage of down payment doesn't affect default rate. If that were true it would seem that they are attempting to create "built in" revenue as the 20% of total loan is guaranteed $ to the seller/sellers mortgage company...

Sounds like it's very good for the businesses involved and might be prohibitive to leveraged landlords who rely on their credit rating to buy up properties as they come available on the cheap and use the cumulative rental incomes to cover all the mortgages across their entire balance sheet.

Requiring 20% down for home ownership is a pretty sound financial move in my opinion. Requiring it regardless of outside circumstances seems shady.

 

[JCAJR30]

Seems like landlords will have an easier time filling their properties since - i assume - a large % of people live payday to payday. If you can rent ~100% of your properties you're making out like a fat cat in the barnyard.

 

[Leo]

Maybe the regulators already know what is happening with the economy, and want to be sure there is some equity left after the market deflates some more. I sold my (paid for) home before the market burst in 2006. I have saved and invested the money. I can by that house back today for $50,000 less, as well as hundreds just like it.

For example, If the guy that bought my house put 30% down, the best he can do right now is sell it for what he owes, the $50K he put down is all eaten up by deflation of housing prices. Pretty sad for him and for millions of home owners.
(note: That was an example, I have no idea of how much cash he actually put down, that is between him and his bank, not my worry)

Bad governmental debt policy caused the boom, the bubble and the bust. I agree with many loan experts, that the deflation has not yet hit bottom. That 20% down payment may be a zero equity loan a year from now.

 

[88GT]

I agree and disagree with you.

1. People need to read your post and realize what you said... this is a regulation between lenders, not a law.

This is a regulation forced on loan originators to comply with equally asinine terms of the Dodd-Frank financial reform legislation. The goal of reducing defaults is only half of the picture.

2. I believe people with more of a vested interest in a property will be less likely to default on the remainder of the loan.

This only applies within cohorts of equal credit rating. See below.

3. This "regulation" smacks of insincerity.... Almost seems like the lenders believe as you do, that percentage of down payment doesn't affect default rate. If that were true it would seem that they are attempting to create "built in" revenue as the 20% of total loan is guaranteed $ to the seller/sellers mortgage company...

In point of fact, in the latest housing downturn, default rates correlate more strongly with the creditworthiness of the borrower than they did with the amount of down payment. It is a matter of circumstance that borrowers with ****ty credit will have low to no down payment. But providing low to now down payment is not an indicator of risk.

What they are attempting to do--or more specifically, what the regulators are attempting to do for them--is provide a vehicle for the loan originators to comply with the part of the Dodd-Frank reform act that requires lenders to retain a particular amount of capital on hand relative to their outstanding risk. They think they're being cute by arguing that such requirements will also limit defaults because they believe, as you do, that down payment amount alone is the single largest factor in determining risk.

While it's a matter of practical fact that those who can't provide a 20% down payment are almost always those with rotten credit and defaults from that cohort will go down simply because the loans made will go down, it remains to be seen if the actual percentage of defaults within that cohort will actually decrease. The regulation doesn't prohibit loans with LTVS greater than 80%. It simply makes them costlier to obtain. But in the 10+ years I've been doing this, the upfront and overall cost of a loan are not something that poor credit people factor into their decisions. All they care about are monthly payments. I once sat on the other side of the table from a buyer who paid $5000 in middle man fees alone. None of that included the actual costs of loan origination from the lender. This will not prevent poor credit buyers from getting loans, and thus will not prevent their defaults.

Sounds like it's very good for the businesses involved and might be prohibitive to leveraged landlords who rely on their credit rating to buy up properties as they come available on the cheap and use the cumulative rental incomes to cover all the mortgages across their entire balance sheet.

Landlords/investors are already saddled with asinine limitations on their purchasing power. Fannie just recently rescinded a 4-mortgage limit on their conforming standard, but no lender outside of the private investment firms will agree to originate a 5th loan. It's almost impossible to find a lender who will originate a non-conforming loan these days, regardless of the borrower's credit rating.

Requiring 20% down for home ownership is a pretty sound financial move in my opinion. Requiring it regardless of outside circumstances seems shady.

The circumstances that made that a near universal truth 30 years ago no longer exist though. And in a downward moving market, it is actually a risky move. For every reason you throw out why it's a good one, I can provide a reason why one wouldn't want to do it.

But all of that is beside the point. The point is that these regulations will not help the housing market, will not decrease the rate of foreclosure, and will--at a minimum--forestall a recovery for quite awhile. Though I would have thought INGO to be a little more sensitive to the fickle dictates of such personal matters by the feds.

 

[Westside]

I personally don't think that the GOVERNMENT should mandate this. *

I think it should be up to the specific lender.

*If the lender is originating a loan using ANY federal monies at all, then, as a taxpayer, I want a 20% down payment.

-J-

I like this answer.

 

[IndySSD]

*Snip.... I understand your position on these points and understand your points here, I don't necessarily disagree**



The circumstances that made that a near universal truth 30 years ago no longer exist though. And in a downward moving market, it is actually a risky move. For every reason you throw out why it's a good one, I can provide a reason why one wouldn't want to do it.

I don't believe that the conditions that made having 20% of your purchase on hand are extinct. It boils down to budgets, willpower and personal fiscal responsibility. If you can't save up 20% of your prospective homes price, you probably aren't ready to deal with being a homeowner. There are extenuating circumstances of course but this is a pretty solid methodology.

But all of that is beside the point. The point is that these regulations will not help the housing market, will not decrease the rate of foreclosure, and will--at a minimum--forestall a recovery for quite awhile. Though I would have thought INGO to be a little more sensitive to the fickle dictates of such personal matters by the feds.

I think INGO has quite a few fiscal conservatives who are torn on the matter.

Like I said earlier, I'm dead against federal laws dictating what lenders can do, I'm not necessarily against lenders forcing prospective buyers to be fiscally responsible.....

By the way, thank you for your informed perspective on these subjects and the time you've invested in linking and describing the impact and scope of these proposals. It's nice to read a well supported and informed position on a meaningful subject! Reps inc when I recharge...others should feel free to drop 88GT some reps in the meantime.

 

[BarryJaxon]

The .gov can`t keep it`s own house clean,think they`ll give a **** about yours?

 

[88GT]

I don't believe that the conditions that made having 20% of your purchase on hand are extinct. It boils down to budgets, willpower and personal fiscal responsibility. If you can't save up 20% of your prospective homes price, you probably aren't ready to deal with being a homeowner. There are extenuating circumstances of course but this is a pretty solid methodology.

I should have been more clear. The conditions aren't gone, they are simply less applicable to the personal circumstances of families these days.

The bottom line of my argument is that the down payment is an asset and it's simply ludicrous to believe that all families/individuals will benefit most by having it sit in the equity of a home. It worked when home buyers intended on staying in the home they purchase for the life of the loan. It meant that not only was the monthly payment more affordable, but it significantly decreased the total amount paid by the borrower by tens of thousands of dollars. But buyers aren't staying in their homes that long anymore. More than half will move every 5-10 years. On the early end of that spectrum, all but a few dollars of monthly payment is going to interest anyway, so there are no real savings accruing to the borrower for having had $20K dollars sitting there doing nothing.

Let's not forget that in today's market, depreciation may have actually resulted in the LOSS of that down payment. It's a paper loss, to be sure. But that's small consolation to the borrower.

Then there's the opportunity costs of using that money elsewhere. My husband and I purchased our personal home with very little money down. We then turned around and used what could have gone towards a down payment to purchase a rental property that MAKES us money. Other people might put it towards a business they run. The savings in the short term is an illusion. At current interest rates, a $5000 difference in down payment is about $25 on the monthly payment ($5/$1000 financed is roughly what you get from a 5% interest rate.)

Homes aren't purchased for the same reasons these days and the opportunity costs have changed accordingly. For most people, it simply doesn't make sense divest themselves of such a large sum of money up front. Especially when they can realize nearly equal savings by paying down the mortgage on a faster schedule without sacrificing the nest egg. (Assuming the didn't max their monthly payment.)

I understand your point about the fiscal responsibility of someone being ABLE to save up the down payment. But ability does not translate into actual act. And having a large down payment doesn't indicate risk of default either.

I think INGO has quite a few fiscal conservatives who are torn on the matter.

Why is that, do you think? I was ranting to hubby last night about the apparent apathy INGO seems to have on this subject.

Like I said earlier, I'm dead against federal laws dictating what lenders can do, I'm not necessarily against lenders forcing prospective buyers to be fiscally responsible.....

I know. It's just frustrating because this regulation is going to have the same effect on the housing industry as 20% rates did in the late '70s and '80s. And no one seems to care now, but I'd bet someone's next down payment that they'll be the first ones *****ing how they can't sell because their home value hasn't moved in the upward direction for the last 10 years.

[quoteBy the way, thank you for your informed perspective on these subjects and the time you've invested in linking and describing the impact and scope of these proposals. It's nice to read a well supported and informed position on a meaningful subject! Reps inc when I recharge...others should feel free to drop 88GT some reps in the meantime.[/QUOTE]

Well, thank you for the kind words.

 

[IndySSD]

I should have been more clear. The conditions aren't gone, they are simply less applicable to the personal circumstances of families these days.

The bottom line of my argument is that the down payment is an asset and it's simply ludicrous to believe that all families/individuals will benefit most by having it sit in the equity of a home. It worked when home buyers intended on staying in the home they purchase for the life of the loan. It meant that not only was the monthly payment more affordable, but it significantly decreased the total amount paid by the borrower by tens of thousands of dollars. But buyers aren't staying in their homes that long anymore. More than half will move every 5-10 years. On the early end of that spectrum, all but a few dollars of monthly payment is going to interest anyway, so there are no real savings accruing to the borrower for having had $20K dollars sitting there doing nothing.

This is a particularly interesting point that I hadn't really thought of people buying homes who didn't plan on owning them for 15 years (What I consider to be a reasonable length of mortgage). I always envisioned people only selling a house if they had to move far away and couldn't use it as a rental, otherwise why not just keep that property and use it for income when you decide you want to move into a new house?

Let's not forget that in today's market, depreciation may have actually resulted in the LOSS of that down payment. It's a paper loss, to be sure. But that's small consolation to the borrower.

Then there's the opportunity costs of using that money elsewhere. My husband and I purchased our personal home with very little money down. We then turned around and used what could have gone towards a down payment to purchase a rental property that MAKES us money. Other people might put it towards a business they run. The savings in the short term is an illusion. At current interest rates, a $5000 difference in down payment is about $25 on the monthly payment ($5/$1000 financed is roughly what you get from a 5% interest rate.)

Homes aren't purchased for the same reasons these days and the opportunity costs have changed accordingly. For most people, it simply doesn't make sense divest themselves of such a large sum of money up front. Especially when they can realize nearly equal savings by paying down the mortgage on a faster schedule without sacrificing the nest egg. (Assuming the didn't max their monthly payment.)

Very good points.

I understand your point about the fiscal responsibility of someone being ABLE to save up the down payment. But ability does not translate into actual act. And having a large down payment doesn't indicate risk of default either.

Personally I would think of someone who has little or no existing debt with a considerable amount of liquid assets as being very low risk of default. I can see how the originators of this "regulation" had this envisioned. I also can see how this would negatively impact the housing market as you suggest.

Why is that, do you think? I was ranting to hubby last night about the apparent apathy INGO seems to have on this subject.

I'd say it's because many people here who would be interested in this thread are older and remember when anyone who DIDN'T have 20% saved up for a home weren't "ready" to be homeowners...... Also, fiscal conservatives (such as myself) believe that a large part of the issue with the "Housing Bubble" was due to (forgive the term) "Predatory Lending".... IE: Builders originating loans themselves to people who should have never been approved for the amounts that the builders give them who then sell those loans to mortgage handling companies like "Countrywide".

I know. It's just frustrating because this regulation is going to have the same effect on the housing industry as 20% rates did in the late '70s and '80s. And no one seems to care now, but I'd bet someone's next down payment that they'll be the first ones *****ing how they can't sell because their home value hasn't moved in the upward direction for the last 10 years.

Hmm.... I don't know if I can equate requiring 20% down to 20% APY's but I can see how someone in the housing industry would view this as overly prohibited. I think it would honestly be OK if there were some sort of sliding scale... IE: Credit risk = low, then lender requires 0-5% down, Credit risk = medium, 10%, High medium 15% and high risk = 20%....


Examples of what I would consider reasonable requirements:

• Jenn has a 750 credit rating, owns 2 properties cash out, holds mortgages on 3 other income properties and can show evidence of positive cash flow while maintaining a reasonable amount of liquid reserves.. Jen is easily considered low risk and is approved for a 0% down mortgage to purchase a new residence/income property.
• James has a 700 credit rating, has an existing mortgage with good payment history on his primary residence with little to no other existing debt and about a 6-12 month expense level of liquid reserves... James is considered low risk but is required to place a 5% down payment to purchase an investment/rental property.
• Jordan has a 650 credit rating, no existing mortgage, low to moderate existing debt (car payment, maybe 1 credit card). Good payment history on all utilities and rent for previous 36 months. Jordan is deemed medium risk depending on employment history and monthly cash flow and is thereby required to place a 10-15% down payment for a home.
• Jason has a 600 credit rating and a bankruptcy 6 years ago. He has two credit cards and an auto loan. His rental and utility payments show several late payments over the last 36 months. Jason has worked diligently over the last two years to catch up and save up a nice nestegg, he can show no late payments over the last 12 months and is required to place 20% down to purchase a home.

That would be what I expect to see if we were discussing "reasonable" lender regulations.....

By the way, thank you for your informed perspective on these subjects and the time you've invested in linking and describing the impact and scope of these proposals. It's nice to read a well supported and informed position on a meaningful subject! Reps inc when I recharge...others should feel free to drop 88GT some reps in the meantime.

Well, thank you for the kind words.

NP, still waiting to recharge.... don't know how I went through all of it yesterday.... but I owe you for this thread and the Joe vs. Jose thread...

 

[ATOMonkey]

I personally don't think that the GOVERNMENT should mandate this. *

I think it should be up to the specific lender.

*If the lender is originating a loan using ANY federal monies at all, then, as a taxpayer, I want a 20% down payment.

-J-

I don't understand why I need to pay for another person's residence period.

How about if any loan is going to use federal monies then I want a 100% down payment.

 

[IndySSD]

I don't understand why I need to pay for another person's residence period.

How about if any loan is going to use federal monies then I want a 100% down payment.

Wow... that would pretty much royally screw over military veterans... you sure you want to stand on that one?

 

[ATOMonkey]

Wow... that would pretty much royally screw over military veterans... you sure you want to stand on that one?

Their wage is not government money any more than a police officer's wage is city money.

 

[IndySSD]

Their wage is not government money any more than a police officer's wage is city money.

Who said anything about their wage? I'm talking about VA mortgages....