Changes in mortgage finance rules could hurt housing recovery

The government is proposing to limit the best interest rates and terms to buyers who can put 20% down, meet stringent debt limits and have sterling credit.

By Kenneth R. Harney, LA Times

April 10, 2011

Reporting from Washington


You may have seen reports that the federal government is proposing new mortgage finance rules under which only home purchasers who can afford a minimum 20% down payment on a conventional loan would get a shot at the best interest rates and terms.

That is correct, and it’s deeply sobering news for large numbers of first-time and moderate-income buyers who can’t come up with that much cash or afford to pay higher rates.

But some of the other requirements that federal agencies and the Obama administration are proposing in the same plan have gotten much less attention yet could prove just as troublesome for consumers:

•Strict mandatory debt-to-income limits. Under the proposal, to get the best mortgage rates, you would need to spend no more than 28% of your gross monthly income on housing-related expenses, and you couldn’t have total monthly household debt that exceeds 36% of your income.

There would be no flexibility to go beyond these ceilings, unlike in today’s marketplace, in which Fannie Mae and Freddie Mac consider debt-to-income ratios along with other factors through their electronic underwriting systems. Freddie Mac, for example, has an overall debt-ratio limit of 45% of an applicant’s stable monthly income.

•To refinance your existing mortgage and replace it with one carrying the best interest rate, you’d need no less than a 25% equity stake in your house to qualify. If you sought to take any additional cash out through a refi, you would need 30% equity. Today’s typical requirements for a conventional refi are nowhere near as strict.

•Pristine credit standards. For example, if you were 60 days late on any credit account during the previous 24 months, you would be ineligible for a mortgage at the best terms.

These are all core features of what may be the most sweeping and controversial set of changes in decades for the housing and mortgage markets. The so-called “qualified residential mortgage,” or QRM, proposals were released at the end of March by banking, securities and housing regulators, along with the Department of Housing and Urban Development. The agencies were required by the 2010 financial reform legislation to come up with new standards for low-risk conventional mortgages.

Congress did not specify what a “safe” mortgage should look like but directed the agencies to consider such factors as full documentation of borrower income and assets plus avoidance of toxic features such as negative amortization and balloon payments. Congress was silent on the subject of minimum down payments.

Under the law, loans that do not meet the strict QRM tests will be pushed into a less-favored, higher-cost category: Banks and Wall Street securitizers would need to set aside 5% of loan balances in reserves to cover possible losses from defaults. This extra capital cost inevitably would be passed on to consumers.

Mortgage industry estimates of the interest rate differential between ultra-safe, QRM-qualifying loans and all others range from three-quarters of a percentage point to 3 percentage points. In today’s market, this would mean that mortgages that meet the federal agencies’ stringent new standards might go for 5%. But all others — the vast majority of today’s conventional loans — could cost from just under 6% to 7% and higher.

You can muster only a 10% down payment? Tough. You can’t quite fit into the tight confines of the QRM’s debt-to-income ratio rule? Pay up.

Where and when will this all start hitting the marketplace? The proposals are out for public comment through June 10 and probably won’t be put into effect until mid-2012. The agencies’ proposal, though not the legislation, exempts mortgages sold to Fannie Mae and Freddie Mac from the rule as long as both remain under federal conservatorship — a date uncertain. FHA and VA mortgages would not be subject to QRM either.

Meanwhile, builders, consumer groups, banks, real estate agents and others are readying campaigns to persuade the regulators and the Obama administration to back off some of the provisions. Michael Calhoun, president of the Center for Responsible Lending, argues that if adopted in its current form, the proposal would make it much tougher for modest-income and minority consumers to afford a first home.

Jerry Howard, chief executive of the National Assn. of Home Builders, says the agencies and the administration have strayed far beyond Congress’ intent, and their proposals threaten to wreck any recovery in housing and force millions of Americans to rent rather than to own.

“I think we’re in for a hell of a fight,” he says.

 

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