Housing stakeholders warn against strict mortgage down-payment requirements

Housing industry leaders and congressional lawmakers are ramping up their push for regulators to resolve a residential mortgage rule without placing strict down payment requirements on borrowers.

Bankers, real estate agents, home builders and lawmakers got a renewed jolt after President Obama's State of the Union address to press their point that new rules determining a borrower's ability to repay a loan will be the central consideration for obtaining a mortgage.

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They argue that mortgage lenders will need flexibility in making loans under the new qualified mortgage (QM) rules, and that specific down payment requirements in a still-developing qualified residential mortgage (QRM) rule will hamper home purchases and lock out many qualified buyers.

Jerry Howard, president and CEO of the National Association of Home Builders (NAHB), said a borrower's ability to repay should be looked at "holistically" and that a down payment requirement would be the "antithesis" of that.

Amid tight lending conditions in the mortgage market "we do think the president is sending the right signal," Howard told The Hill.

Any unfinished regulations put a "chill on the market" and "no matter what prevailing wind is seeming to blow at the back of the housing industry, regulators are in a position to key up the housing sector and play a huge role in the traditional spring season."

"When we catch fire, we're fueling the optimism," he said.

Regulators say they will complete the QRM rule sometime this year, although Howard and a growing number of lawmakers are pressing for a quicker resolution to provide greater certainty in housing finance.

Bob Davis, executive vice president at the American Bankers Association (ABA), said the two rules should contain identical requirements for borrowers and a QRM rule is no place for unnecessary restrictions.

Davis said he would prefer that QM and QRM contain identical requirements because the QM, which was completed in January, includes significant consumer protections on top of the new rule issued by regulators detailing how mortgage lenders will determine a borrower's ability to pay back their loan.

"Don't write a rule that takes out the flexibility for the underwriting process when the 'ability to repay' rule already provides a lot of protections," he told The Hill.

There is no down payment requirement in the QM rule.

Setting a percentage of a down payment would draw a line in the sand for the risk retention requirement, he said.

Under the new QM rules, Davis said lenders will determine the amount of a down payment based on a broad range of required borrower qualifications and it would hurt those who couldn't meet the requirement.

The down payment issue stems from a 2011 preliminary draft that called for borrowers to put down 20 percent or face holding a loan that would be considered risky because it would not fall under the QRM requirement.

On Thursday Sens. Kay Hagan (D-N.C.), Mary Landrieu (D-La.) and Johnny Isakson (R-Ga.), authors of the proposed QRM provision, said the first draft was "a misinterpretation of the intent of the provision in the law that could needlessly slow the housing market’s recovery and price well-qualified Americans out of the market," they wrote in a letter to regulators.

"The QRM rule published over a year ago proposed an overly rigid, narrow standard that will result in many responsible borrowers being denied the opportunity to purchase a home with sustainable terms and pricing they can afford," they wrote.

Several regulators suggested on Thursday that the QRM and QM rules could be merged or, at least, closely aligned to avoid restricting lending.

Federal Reserve Board Governor Daniel Tarullo told the Senate Banking Committee that the largest concern for regulators is to avoid constricting "credit to middle and lower-middle class people, who might be priced out of the housing market, if there's too much in the way of duplicate or multiple kinds of requirements at the less than highly creditworthy end."

"So I think it's definitely the case that on the table should be consideration of making QRM more or less congruent with QM," he said.

Mark Zandi, chief economist with Moody's Analytics, told The Hill, that lining up the QM and QRM rules would "be a big plus.

"Nailing down QRM and lining it up with QM would go a long way to restarting the securitization market and an easing in credit standards," he said.

"This will become increasingly important to the housing market as it kicks into a higher gear."