A group of federal regulators will likely lower the proposed 20% down payment requirement for home-loan lenders who wish to avoid holding added credit risk on the securitization of mortgages.
The five federal regulators proposed the rule in March 2011 under the Dodd-Frank Act. It requires a bank to maintain 5% of the credit risk for mortgages and other loans sold to the secondary market, also known as skin-in-the-game. The exception is the qualified residential mortgage, which requires at least a 20% down payment from the borrower, among other standards including a tightened debt-to-income ratio.
Regulators are expected to loosen these restrictions in a finalized rule due this year after the Consumer Financial Protection Bureau cements new guidelines on the broader qualified mortgage rule.
“They’re not talking about 20% anymore,” said Rep. Barney Frank, D-Mass., in an interview with HousingWire. “I think 20% is high, but it has to be.”
David Stevens, CEO of the Mortgage Bankers Association, said from his talks with policymakers in recent weeks that the down payment requirement on the QRM will likely be lowered.
When rule makers announced the proposal last year, fair lending groups and industry officials immediately criticized it for shutting out first-time homebuyers who could not afford the upfront costs. A report from CoreLogic (CLGX) showed 39% of buyers in 2010 put less than 20% down on their purchase.
A major proponent of the 20% rule, Sheila Bair, is no longer the chair of the Federal Deposit Insurance Corp., so opposition to loosening the QRM standard may be lessened in her absence. Bair supported a narrow definition to protect against poor underwriting practices that contributed to the housing bust in 2007.
“The QRM is the exception, not the rule, and as such, I believe should be narrowly drawn,” Bair said at the time the QRM was proposed. “Properly aligned economic incentives are the best check against lax underwriting.”
The Department of Housing and Urban Development suggested to Congress last year a 10% down payment threshold instead.
While Frank said the 20% down payment was high and would likely be reduced. He still defended the rule altogether.
“We used to make loans without securitizations. And also they must not think they’re making good loans if they can’t hold 5%,” Frank said. “Do they have so little confidence in their judgments that that’s fatal to them?”