20 Percent Down Payment Rule

by Joel Barkman

As the debate continues over lending regulations, appraisal practices, and tax laws for homeowners, there are many in the home building industry that feel "homeownership" is under attack. It has become increasingly more difficult to access financing for new construction and home improvement projects and there are those who would make it even more challenging.

In an effort to correct a flawed system while still making homes attainable, a bipartisan group of U.S. senators and representatives last month joined with the National Association of Home Builders (NAHB) and other business and consumer groups in calling on federal regulators to revise a pending proposal that would require a minimum 20 percent downpayment for "qualified residential mortgages."

They argued that such a plan goes against the intent of Congress, would keep homeownership out of reach of most first-time home buyers and many middle-class households, and would deal a devastating body blow to the already fragile housing market.

The Coalition for Sensible Housing Policy, which is comprised of more than 40 industry and consumer groups, including NAHB, that are united in opposing the proposed 20 percent downpayment rule argues that "this rule is an overreach," and "if left as is, it would make recovery in the housing market almost impossible."

Under the Dodd-Frank financial reform law passed last year, securitizers are required to have "skin in the game" by retaining 5 percent of the credit risk of each loan backing a security.

The law also called for federal banking regulators to establish rules for a qualified residential mortgage, or QRM, that would exempt lenders from the risk retention requirement.

Borrowers who can't afford to put 20 percent down on a home and who are unable to obtain FHA financing would be expected to pay an estimated 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 annually disqualify about five million potential home buyers, resulting in 250,000 fewer home sales and 50,000 fewer new homes being built per year," said NAHB CEO Jerry Howard.

"Such a drastic cutback would have a disproportionate impact on … families struggling to achieve the dream of homeownership," he said.

Lawmakers have noted that nothing in the Dodd-Frank Act stipulated a downpayment rule for the QRM provision and they have expressed concern that the regulators did not follow the clear legislative intent behind the provision.

"This misinterpretation of our intent could unnecessarily slow the housing market's recovery and prevent well-qualified, middle-class families from securing an affordable mortgage," said Sen. Kay Hagan (D-N.C.). "We are urging regulators to go back to the drafting table."

Giving the issue some local perspective, the median house price in Virginia is $252,600; home buyers would need more than $50,000 for a downpayment under the proposed rule, which is almost equal to the median annual income.

According to the 2009 data from the Center for Responsible Lending, it would take the average American 14 years to come up with that 20 percent downpayment.

Last month a bipartisan group of 39 senators wrote a letter to federal regulators urging them to modify the proposed risk retention rule because it imposes unnecessarily tight downpayment constraints that would restrict credit to middle-class families working to own a home.

The letter stated that the restrictions "would unnecessarily increase consumer costs and reduce access to affordable credit," and went on to say that "well underwritten loans, regardless of downpayment, were not the cause of the mortgage crisis. The proposed regulation also establishes overly narrow debt-to-income guidelines that will preclude capable, creditworthy home buyers from access to affordable housing finance."

The House is set write a letter as well with the same criticism. "The qualified residential mortgage definition regulators have proposed is so restrictive it threatens to cut off millions of otherwise eligible consumers from the dream of owning a home and will drive the bulk of real estate lending in this country to the largest institutions that enjoy the lowest cost of capital," explained one Congressman.

NAHB has strongly weighed in on this matter as a member of the Coalition for Sensible Housing Policy and in testimony before Congress, urging regulators to come up with a fairer QRM definition that does not unduly impact credit-qualified home buyers.

On June 22, the coalition also submitted a white paper to regulators as a joint comment letter.

The 44 organizations that signed on to the white paper are calling on regulators to "redesign a QRM that comports with congressional intent: encourage sound lending behaviors that support a housing recovery, attract private capital and reduce future defaults without punishing responsible borrowers and lenders."

Federal regulators recently extended the comment period for the 20 percent downpayment rule until Aug. 1, and NAHB is currently drafting comments for submission ahead of the new deadline.

In the meantime, the ability to own a home is not necessarily a "right", but it is a privilege that in the past has made this country great and it is a promise that I am proud to defend.

If you want to keep your chance of earning a piece of the "American Dream" &emdash; just "Ask a Builder."

As always e-mail your questions or comments to joel@goldenrulebuilders.com or write to "Ask a Builder" at P.O. box 294, Catlett, VA 20119.

Barkman is past president of the Fauquier Chapter of The Northern Virginia Building Industry Association.

Read Joel's column weekly in the