Most everyone agrees that changes are necessary to correct the flaws in the financial system that contributed to the meltdown of the housing market. And Pierce County is not immune to the challenges of foreclosures.
But a proposal being offered by federal regulators requiring more “skin in the game” for home buyers is an overreaction and threatens to make matters even worse here and elsewhere in the state.
New rules for Qualified Residential Mortgages (QRMs) are being considered as part of the Dodd-Frank Consumer Protection Act, which aims to restore safety and soundness to the lending process.
QRMs have been around for years and are designed to be the criteria used to constitute reasonable, safe, routine mortgages. They are also the standard by which lenders are able to sell mortgages to investors, eliminating the risk associated with possible default by the borrower.
But under the proposed rule, issuing QRMs would require a higher down payment by the borrower – 20 percent. The standard would also exempt lenders from having to retain 5 percent of the risk of each mortgage.
Federal Reserve Chairman Ben Bernanke and others call this “skin in the game”; the assumption is that a larger down payment will make homeowners think twice about walking away from their homes. Some even refer to such a rule as “going back to basics” or a “return to the fundamentals.”
As a Realtor, I ask myself how many of my buyer clients have 20 percent to put down? Very, very few, especially first-time buyers. Historically low foreclosure rates among FHA and VA loans – loans that require the lowest down payments – are clear evidence that the key to safe lending is sound underwriting and documentation, not large down payments.
How many foreclosures in Pierce County can be blamed on a low down payment? My experience in hundreds of transactions over 16 years is that the size of the down payment is not linked to the likelihood of default. I can count on one hand the number of first-time buyers who put 20 percent down.
The proposed rule would either turn away otherwise responsible buyers with good credit who lack 20 percent to put down or force them into more expensive mortgages.
Numbers back up the assertion that larger down payments have no meaningful effect on default ratios. Data from 2002 and 2008 from CoreLogic Inc. indicate that raising down payment requirements from 5 percent to 10 percent decreases default rates a mere 0.2 percent to 0.3 percent – yet eliminates 7 percent to 15 percent of the borrowers from lower rate QRM loans.
Increasing the minimum down payment to the proposed 20 percent lowers the chance of default by only 0.8 percent, but excludes 20 percent to 25 percent of borrowers.
The Center For Responsible Lending has reported that it would take a family with the national median income of $54,474 approximately 16 years to save up a 20 percent down payment to buy a median priced home of $172,900. In Pierce County, it would take 10.8 years based on a median income of $69,975 and a median home price of $197,000.
For an Army master sergeant at Joint Base Lewis-McChord with 10 years experience, it would take 15.9 years to save for the required down payment.
It’s not just realtors who oppose the 20 percent down requirement. Bankers, civil rights groups, home builders and the Center For Responsible Lending have all publicly criticized such a proposal as restrictive, unnecessary and even discriminatory.
A healthy housing market would help jump-start economic recovery. But this rule is not the way to restore that health. Sound underwriting, not larger down payments, should matter the most when assessing default risk.
Locally, there’s reason for optimism. Fiserv, a national financial data firm, recently projected a 24.9 percent increase in Tacoma home prices in 2012 and 2013. The projection was tops in the nation.
At a time when the local housing market seems poised for a rebound, changes to QRM requirements would be both harmful and irresponsible. Responsible underwriting is critical to responsible home ownership – not more “skin in the game.”
Mike Larson is president of the Tacoma-Pierce County Association of Realtors and the designated broker at Allen Realtors in Lakewood.
