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Twenty Percent Downpayment Rule Would Disrupt First-time Home Buyer Market

WASHINGTON, D.C. – March 30, 2011 – (RealEstateRama) — A plan unveiled today by the Federal Deposit Insurance Corp. that would require a minimum 20 percent down payment for “qualified residential mortgages” would disrupt the housing market and jeopardize the economic recovery, according to the National Association of Home Builders (NAHB).

“By mandating a 20 percent down payment on qualified residential mortgages, the Administration and federal regulators are excluding those without huge cash reserves – which constitutes most first-time home buyers and many middle-class households – from a chance to buy a home,” said NAHB Chairman Bob Nielsen, a home builder from Reno, Nev. “Just do the math. First-time home buyers historically average 40 percent of home-buying activity. It would take an average family 12 years to scrape together a 20 percent down payment. This plan is nothing short of an assault on homeownership that could have a long-lasting negative impact on housing for generations to come.”

Under the Dodd-Frank financial reform law passed last year, lenders are required to have “skin in the game” by retaining 5 percent of the credit risk of each loan that they sell into the secondary market. The law also called for federal banking regulators to establish rules for a qualified residential mortgage, or QRM, that would exempt lenders from these risk retention rules. The Dodd-Frank law exempts FHA and VA loans from the risk retention requirement and the proposed risk retention rules will not apply to Fannie Mae and Freddie Mac while they remain in conservatorship.

The exclusion of FHA and VA and, at least temporarily, Fannie and Freddie from the risk retention requirement provides some short-term cushion to the impact of the proposal but that relief will be short-lived and is eroded by the tighter underwriting and higher costs already imposed by those agencies. Further exacerbating the situation, the Obama Administration has announced its intention to shrink FHA’s share of the marketplace, lower FHA and conventional conforming loan limits and further increase fees on FHA, Fannie Mae and Freddie Mac home loans. These changes, combined with the effects of an overly restrictive QRM, would make it even more difficult for buyers to access affordable housing credit.

By stipulating a 20 percent borrower down payment for a loan to be considered a qualifying residential mortgage, the Administration and federal regulators are preempting congressional efforts to reform the housing finance system by imposing a narrow and rigid gateway to the secondary mortgage market.

Borrowers who can’t afford to put 20 percent down on a home and who are unable to obtain FHA financing will be expected to pay a premium of two percentage points for a loan in the private market to offset the increased risk to lenders, according to NAHB economists. “This would disqualify about 5 million potential home buyers, resulting in 250,000 fewer home sales and 50,000 fewer new homes being built per year,” said Nielsen. “Such a drastic cutback would have a disproportionate impact on minorities and low-income families who are struggling to achieve the dream of homeownership.

“By significantly and unnecessarily raising the cost of purchasing or financing homes, this sledgehammer approach to restore the health of the mortgage markets makes no sense,” he added. “If buyers are denied access to affordable housing credit, the shadow inventory of foreclosed homes will not be drawn down, a housing recovery will not take hold and economic growth will stall.”

And with credit already extremely tight for home buyers and home builders, this overly restrictive QRM definition would drive countless lenders from the residential mortgage market, including thousands of community banks, and enable only a few of the largest lenders to originate and securitize loans, said Nielsen.

“This sharp dilution of mortgage market competition would further diminish mortgage credit availability and drive costs higher.”

Five other federal agencies are expected to sign off this week on the risk retention/QRM proposal, which will be published soon after in the Federal Register. The public will be granted a 60-day comment period before the agencies make a final decision.

“Millions of low down payment loans have been originated safely for decades,” said Nielsen. “Low-down payments are not what drove this lending crisis. It was lax underwriting standards. Unfortunately, regulators chose to focus on excessive down payment requirements as some type of silver bullet to solve the lending crisis when they should have looked at other underwriting failures and unsound mortgage products that produced the lending disaster.”

Nielsen urged the Administration and federal regulators to reassess their position and offer a new plan that ensures a safe and healthy mortgage market, lowers the risk of default and keeps homeownership affordable for working American families.