How would a larger down payment requirement impact you?

I have written several posts in the past about the proposed rules being debated.  These new rules could impose down payment requirement of up to 20%.  This is not to say that one could not get a mortgage through FHA for lower down payments or that banks wouldn’t make loans for lower down payments.  However, these new down payment thresholds would determine the pricing of the loan.  So in order to get the best rate you would be looking at a minimum of paying a 10% down payment.  How would this impact you and your ability to buy a home?  If you already own, how much longer would you of had to wait?  Would this make you move on from owning a home?  These are all questions that are being asked.  Please check out this video and then share how this could or would have impact you.

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How the QRM will Change your Mortgage Loan

I have already done a series of blogs on my perspective of the QRM, but I wanted to share a post Adam Rust of BankTalk and CRA-NC did on the topic.  Below is a cross post of his blog.


This is a difficult time for American reporting. Most of America’s attention is shifting between the polar magnetism of Casey Anthony (see CNN’s “Essential guide to the Casey Anthony Trial“) and the debt ceiling crisis.

Left to progress under the radar is a substantial change in how Americans buy homes. You may have seen some reference to the qualified residential mortgage (“the QRM”) in the business section of your paper or perhaps from Bank Talk. The QRM is difficult to understand, in part because it is hard to explain what it means without going into a series of double negatives. But it goes something like this: banks will soon have to extract a down payment of at least twenty percent on any loan that they originate in order to avoid having to keep at least 5 percent of that loan on their books.

Banks don’t want to hold on to mortgage debt. The development of a secondary mortgage market solved that problem and it has changed the entire scope of how loans are now made. The QRM would change that in a sudden fashion. Normally, a bank sells a loan less than 90 days after closing. They are not interested in the interest – they write a loan in order to generate fees. Retaining five percent creates a liquidity strain, particularly for small banks.

The Senate Banking Committee held a hearing about the QRM earlier this month. This is an excerpt from one of the testifiers:

The respondent, Peter Skillern, is getting across a point that should be clear to everyone. Most Americans do not have twenty percent to put down on a home. If you live in any kind of big city, then the price of a new home is probably over $250,000. The average cost of a home across the United States fell from as high as $210,000 a few years ago to now a bit over $170,000. Even at the last price point, pulling out $34,000 plus closing costs is going to stretch a lot of people.

First-time homebuyers are a critical constituency, because they tend to be the ones that buy the houses that more well-off people are trying to sell. Think about it – it is hard to move up to a bigger home when you can’t sell your starter home.

Another Hurdle to Home Ownership

With all the talk about the QRM rule definition and the impact it will have on the housing market, another hurdle is flying under the radar.  Adam Rust from the Community Reinvestment Association of North Carolina (CRA-NC) has written a report about the other hurdle to home ownership, Loan Level Pricing Adjustments.

In short, these pricing adjustments are loan fees added to the cost of a loan that take into account the risk of the borrower.  This fee is designed to better assess the risk of a borrower and apply that cost to a loan.  The adjustment takes into consideration 5 key points: Credit Score, Property Type, Occupancy, Structure, and Equity.  Here is the breakdown of this adjustment as provided by Fannie Mae.

This adjustment does not take things like moving loans to FHA, the disparate impact on protected classes, and the use of private mortgage insurance into account.  Without taking these into account these adjustments can price out low wealth and minority communities from home ownership, and move more of the burden to FHA.  Just the QRM debate this also could have an impact on the rental market.

If you want to dig deeper into the topic I encourage you to read the report: The New Hurdle to Home Ownership


Final thoughts on the QRM – Does it hurt the rental market as well?

After the policymic article and my posting yesterday, this is my final thought on the QRM.  You already know what I think it will do to minorities and first time home buyers, and what I think it will do to current home owners.  But what about the rental market?

Sine the number of people able to buy a home is going to diminish, you would think that it would lead to an increase in the rental market.  It will, if people can’t buy a home one way to improve their living situation is to search for better quality rental properties.  But the rental market is tied in to the selling of homes.  Most rental homes are done through investors buying vacant homes, renovating them, and renting them out.  These investors will likely be squeezed by the new rules as well.  Instead of keep more money on hand to do the renovations, investors will have to use that capital for down payments and if they don’t go to 20% they will pay the extra mortgage insurance.  I am not sure what investor wants to limit their cash flow and pay an additional premium.  Those that do this will pass the cost on to the renter with higher rents.

Paying higher rents will make it less likely they will be able to save a large down payment, making the renter more likely to stay where they are.  Other investors not wanting to take on the added cost risks will back out of being investors.  This leads to more of a stalemate in housing sales and limits the number of rental units available, making rental prices go up.  There are only but so many places to build apartments and apartments aren’t for everyone.

For both renters and home buyers, these new rules make it harder to improve your situation.  Limiting people’s options of where they can live is never a good thing.  Steering in both the renting and home buying process is discrimination.  These new rules are making that housing discrimination easier.  People are being forced to live where they don’t want because that is where the market is placing them.

Looks like now the regulators want to segregate minorities into certain communities.  Making it hard to buy a home is one thing, but when that trickles down into the rental market it becomes a bigger problem.  Now families that aren’t looking to buy a home will be saddled with higher costs and limited options for a growing sector.

With that I end my thoughts on the proposed rules.

Additional issues with the possible QRM definition

If you are unsure of what the QRM is or what it would do, check out an article I wrote for that discusses the issue.  I want to talk about another side of the debate that isn’t often discussed.

This debate has been solely focused on the restrictions is places on first time home buyers, and rightfully so. Redefining the face of home ownership isn’t a good thing and hurts the economy.  Let’s think for a second though about the families that already own a home.  Often times, when they are ready to move, they depend on first time home buyers to purchase their homes.  What happens to this segment of people when there are no buyers for their homes.  With the possible new rules that could change the down payment requirements, even current home owners will have difficulty with a down payment for their next purchase.  That is until they can sell their first home.  When they can’t sell their first home, it prevents them from moving on.  It is a rare instance, in the large scheme of things where a homeowner can afford a second mortgage, and have the large sum for an initial down payment on their next home.

My fear is that not only first time home buyers will be impacted by these changes.  Current homeowners will also face difficulty, and our current housing crisis isn’t solved.  What it would do is further slow down our market, which is already overburdened with housing stock.  Financial reform shouldn’t create more problems for the crisis it is trying to fix.

Just my thoughts.