Whose Skin?

The implosion of the national housing market and the resulting financial meltdown that began in 2007 stripped American families of $11 trillion of wealth—including home equity, family savings, and retirement accounts. Millions, too, lost jobs. Now the solution Congress designed may soon be transformed into a major block to homeownership for creditworthy families.

 

Last year Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act to reduce the risk of another such economic catastrophe. The legislation eliminates most prepayment penalties and places limits on certain fees homebuyers pay. It also aims to protect mortgage market investors by requiring those who package and sell mortgage loans to hold 5 percent of their value. This is known as risk retention, or ensuring that they keep “skin in the game.”

 

Dodd-Frank, however, exempts from this risk retention requirement “qualified residential mortgages” (QRMs), low-risk loans meeting high underwriting standards. Congress left it up to the Treasury Department and other federal agencies to devise those standards.

 

The agencies’ proposed QRM standards could have required private mortgage insurance, requirements for prudent underwriting, and prohibitions on balloon payments and other high-risk features. Instead, they focus on extreme and onerous financial burdens for potential homebuyers, such as requiring a borrower to make a down payment of one-fifth (20 percent) of a home’s purchase price.

 

We know that down payment requirements can prevent households of modest means from obtaining a mortgage. In Portland, for example, the current median price for a home is about $200,000. A purchaser using a QRM would have to make a down payment of $40,000 to purchase that home.

 

The proposed down payment requirement also would increase significantly the time necessary for families to become homeowners, and bar thousands of creditworthy homeowners from a mortgage with low rates and attractive terms. According to the Center for Responsible Lending, a typical family earning the median income would need 14 years to accumulate the 20% down payment on a median priced home.

 

We know, too, that first time homebuyers have driven much of the recent recovery in the residential real estate market. First time buyers (assisted by a federal tax credit) were the source of the 2009 increase in home sales, including the purchase of thousands of distressed properties, and were vital to the increase in 2010 of the purchases, as well (The State of the Nation’s Housing 2010). Many of those buyers, including PHC customers, purchased their homes via programs requiring mortgage insurance and down payments of one to five percent.

The median down payment amount Portland Housing Center customers paid in FY2010 was $7,652.85, or 4.29 percent of the purchase price. If QRM down payment requirements had been in place, thousands of first time homeowners would not have been able to contribute to the fragile revitalization of the housing market, and the nation’s economy. Those are some of the reasons the National Association of Home Builders, the Consumer Federation of America, and the Center for Responsible Lending oppose the QRM proposal.

 

There are a number of ways to structure QRMs to help borrowers and reduce risks for mortgage product investors, such as requiring borrowers to have income to support monthly mortgage payments for the life of the loan, and prohibiting risky underwriting features like balloon payments and negative amortization. Burdening borrowers with unreasonable down payment requirements is punitive, unnecessary, and will close the door to homeownership and wealth creation for millions of qualified and creditworthy Americans.

 

Over the last 20 years, the Portland Housing Center has done one thing very well: provided education, access to resources and support to more than 6,000 families purchasing their first home. We believe “homeownership done right”—intensive education, access to resources, and other support—and not more “skin in the game” helps our customers make good, long-term financial choices, and our mortgage delinquency rate of less than 1 percent bears that out.

 

This burdensome down payment requirement and other elements of the proposed QRM standards could undermine the 20 years of work the Portland Housing Center has done to assist first- time homebuyers find and use safe and affordable financial tools. If put into place, they will, I believe, also have long-range negative effects on our families and communities.

 

The proposal is now available for comment for the next six weeks; the agencies expect to adopt them by summer. We urge all of those who support the Portland Housing Center, and value the benefits of homeownership, to become educated about the issue, and express to members of Congress your alarm about the serious and very negative effects these standards, if adopted, will have. America’s families and neighborhoods deserve no less.