Dodd-Frank: Wanna make a $54K down payment?
There’s a big buzz these days in the real estate blogosphere about the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was signed into law last July. Including 16 titles that address everything from the regulation of hedge funds to the Federal Reserve System, Dodd-Frank has been described as the most sweeping change in financial regulations since the Great Depression. While few seem to disagree that the intent behind the legislation is indeed to offer protection to the consumer, many in the real estate community are concerned about the proposed rule that was released March 29 regarding Qualified Residential Mortgages (QRMs).
And just what is a QRM?
In an effort to shield borrowers from unscrupulous lending practices, Dodd-Frank requires lenders that securitize mortgage loans to retain 5 percent of the credit risk unless the mortgage is exempt. The logic behind this seems solid: if lenders have to retain a portion of the risk, they’ll be less likely to originate shaky loans, right?
FHA loans, which currently require a 3.5 percent down payment, are exempt, as are QRMs, which must meet the following criteria:
• The loan must be for an owner-occupied property, not an investment.
• The borrower must have no judgments, defaults, or bankruptcies for three years prior to application and must have no current payments more than 30 days late on his credit history.
• The mortgage payment must be no greater than 28 percent of the borrower’s gross income.
• The loan must be a straight 30-year program– no interest-only or balloon payments allowed.
• The borrower must put at least 20 percent down.
This last one is the really big bugaboo. Here’s why:
Given that the median sales price for a detached home in the greater Charlottesville area is $267,407, a 20 percent down payment would be $53,480. How many prospective buyers can come up with that kind of cash? Not many.
According to the National Association of Realtors, over 60 percent of homebuyers make down payments of less than 20 percent. No wonder realtors are so worried.
Shannon Harrington, a Realtor with REMAX Commonwealth, who represents clients in both the Richmond and Charlottesville markets, had this to say: “The proposed QRM regulations will reduce the number of able first-time home buyers, without a doubt. And we need those well-qualified first timers to clear this logjam of inventory, re-stabilizing local markets, and make recovery possible."
Harrington raises a good point. Local market reports indicate that this year’s housing inventory is up more than 10 percent over last year’s, so the Charlottesville area has a sizeable logjam to clear.
But wait a minute: do these new regulations mean that those of us with less-than-stellar credit or less than 20 percent to put down can’t get a loan at all? Actually, no.
There will still be opportunities out there, but they’ll cost more because the lenders are taking a bigger risk– and retaining a portion of it themselves. Consequently, interest rates and fees will be higher.
Borrowers can also choose to explore the FHA option since it, too, is exempt from the risk retention requirements. But there are restrictions on that program, as well. The limits on FHA loans vary by location, the low down payment means that mortgage insurance is required, and the appraisal guidelines are stringent.
Pointing out that an improvement in the housing market affects improvement in the overall economy, and limiting the number of qualified buyers will only add to the current economic problems, the National Association of Realtors has prioritized the elimination of the 20 percent down payment. The goal is not to do away with the Dodd-Frank regulations altogether– after all, if these provisions had been in place 10 years ago, the housing market might not be in the shape it’s in now– but rather to loosen them enough to allow for some very necessary movement.
It’s important to note that Title XIV of Dodd-Frank, the portion concerning QRMs, is not scheduled to go into effect immediately. According to realtor.org, the Consumer Protection Financial Bureau has nearly 18 months to issue the final draft of the regulations, so there’s time for concerned homeowners, real estate agents, and would-be purchasers to express their concerns to their lawmakers, if they’re so inclined.
In the meantime, prospective first-time buyers might want to start saving their pennies.
Once a month in this space, Samantha Masone pens a real estate column instead of the usual tour of a house. This is the first one!