Realty Views By Terry Ross
December 3rd, 2013 – Back in the heyday of the exploding real estate market a decade ago, low- and no-down-payment mortgages were pretty much an accepted and welcome fact of life. It helped fuel an appreciation and selling boom that came to a sudden halt five years ago as the Great Recession took away much of what had been considered business as usual in real estate.
Today, following the mortgage bubble and many other financial and economic upheavals, providing a viable financing model that protects lenders from bulk foreclosures while allowing large numbers of borrowers to be able to qualify and afford a home mortgage is the difficult task faced by government regulators and an industry that is still looking to get its footing back.
While the economic turmoil of the last few years has radically changed the game in the private mortgage market from low- and no-down payments back to the old standard of 20 percent for financing a home, it looks like new regulations may even raise the bar higher to upwards of 30 percent for the best rates and terms.
Among the recent proposals set to go into effect in January 2014 is something called QRM-Plus, which is a by-product of the Dodd-Frank Act that was enacted to reform much of the credit financing in this country. If these new regulations go into effect, borrowers will not only have to come up with 30 percent down, but will have to have faultless credit, a debt ratio of 43 percent or less and no secondary financing on the purchase.
Much of the heat in the robust market of the early 2000s was fueled by easy mortgage money featuring almost no documentation or down payment. Today, there are a smattering of low-down programs led by the government-insured FHA programs, but in the private markets 20 percent is the norm. If that goes to 30 percent, even more people get frozen out of the housing market. The Mortgage Bankers Association of America, which strongly opposes the new proposals, estimates that only 18 percent of those who purchased homes in 2012 would have met the new standards being proposed.
The 30 percent down requirement is 50 percent higher than the 20 percent down standard proposed a year ago by the same regulators, who have become a lightning rod as six agencies have taken the offensive to thwart this effort with strong opposition. The Federal Reserve, the Federal Deposit Insurance Corp., the Federal Housing Finance Agency, the Department of Housing and Urban Development, the Office of the Comptroller of the Currency, and the Securities and Exchange Commission are all opposed, in addition to many civil rights and consumer groups.
The 30 percent down concept would also have dramatically different impacts on various racial groups. Nearly three-quarters of African-American buyers put down 10 percent or less for their mortgage compared with 50 percent of all buyers, according to data from the 2009 American Housing Survey cited by the Mortgage Bankers Association. Forty-four percent of Hispanic buyers put down less than 5 percent. The plan also would strongly favor wealthier buyers over those with lower and moderate incomes, and create new hurdles for first-time purchasers, who often strain to put together even small down payments.
The voices on Capitol Hill are calling on regulators to scale back on the proposal – especially in light of the resistance a year ago to the 20 percent requirement that had been proposed but that actually triggered further review and resulted in the new proposals that are being greeted with even more opposition.
It is hard to fathom what the rationale is to create greater hurdles in providing a workable home mortgage model for this country to pursue. Most observers believe the politics and the reality of the economy dictate that less regulation and economic barriers will provide more economic stimulus to the housing market. This would seem to be the common-sense approach – but only time will tell if cooler heads will prevail.
(Terry Ross, the broker-owner of TR Properties, will answer any questions about today’s real estate market. E-mail questions to Realty Views at email@example.com or call 562/498-1049.)