Higher Down Payment Requirement Could Derail Housing Recovery

March 21, 2011 (Chris Moore)
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As part of the Dodd-Frank Finance Reform Bill, in order to reduce the risk of future housing meltdowns like the one we’ve been experiencing since 2007, mortgage lenders will be required to retain 5 percent of the risk of any home loans they make that don’t meet yet to be determined down payment requirements. Known as a “qualified residential mortgage,” or QRM, it is one of the most important pieces of the reform puzzle that some critics say could derail the housing recovery.

According to a recent study by the Center for Responsible Lending (CPL), proposals that have been suggested with required down payments as high as 20 percent could have a severe impact on the housing recovery. CRL studies show that it would take 14 years for the average American family to save enough to cover a 20 percent down payment.

With risk retention, a borrower could still purchase a home but could face interest rates as much as 3 percentage points higher than a QRM compliant borrower, which would force many borrowers out of the market according to some market analysts.

CRL argues that the government’s plan leans too heavily towards solutions that would remove excessive risk-taking by requiring higher down payments, but says higher down payments are not linked to loan performance. They blame sub-prime and alternative loan products for the decline in the mortgage market and that traditional low down payment loans should not be confused with those higher risk products.

“In fact, low down payment home loans have been a significant and safe part of the mortgage finance system for decades,” CRL contended in its analysis.

After rumors got out about the possible QRM down payment requirements, Camerom Findlay, a chief economist for LendingTree, wrote on his blog that it “would have a severe and noticeable impact for borrowers.”

For one, he said, total loan costs to borrowers will go up about 36% and about 15% to 35% of the market will no longer be qualified to apply for a loan.

The effects of QRM could be further complicated by the phasing out of Freddie Mac and Fannie Mae and a lessening role of the Federal Housing Administration (FHA) which together, insure about 90 percent of all mortgages being originated at this time.

Tags: Center for Responsible Lending, Dodd-Frank, qualified residential mortgage, QRM, down payment requirements, housing recovery, mortgage lenders, FHA, Freddie Mac, Fannie Mae