Don’t penalize qualified, responsible homebuyers

The United States is weathering the worst housing market since the Great Depression. It is a market meltdown that has left neighborhoods across America with high mortgage delinquency rates, far too many foreclosures and far too many homeowners struggling with negative equity in their homes.

Regulators, legislators and housing stakeholders are now working to right these wrongs and restore integrity and confidence in our housing finance system. We started last year with the Wall Street Reform and Consumer Protection Act of 2010 to improve supervision of our nation’s banks, increase transparency and enhance consumer protections for home mortgages. This bill, by Sen. Chris Dodd (D-Conn.) and Rep. Barney Frank (D-Mass.), gave clear direction to regulators on how to restore prudence and security in mortgage lending. It is my hope regulators will distinguish between responsible borrowers and lenders versus those who would repeat the mistakes of the past.

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Last year, along with Sens. Mary Landrieu (D-La.) and Kay Hagan (D-N.C.), I authored the Qualified Residential Mortgage provision of the Dodd-Frank financial reform bill. Our provision requires lenders to fully document a borrower’s income and assets, verify that they have acceptable debt-to-income ratios and are capable of repaying their loans. Mortgages that meet the Qualified Residential Mortgage definition would be exempt from the risk-retention requirements of the Dodd-Frank law, thereby providing an incentive for lenders. In turn, borrowers with these mortgages could avoid the added costs that would trickle down to them from their lender. It would be a win-win situation.

Last Friday, the administration unveiled its plan for reforming America’s housing finance market, and I am pleased the plan recognizes the merits of the Qualified Residential Mortgage to “drive high underwriting standards” and to “improve alignment of interests between mortgage originators, securitizers and investors.”

I am concerned, however, that regulators may propose an entirely unnecessary large down payment for borrowers to meet the definition of a Qualified Residential Mortgage. This is not what we intended. We sought to curtail lax underwriting standards and risky products by lenders, not to penalize credit-worthy borrowers seeking homeownership. In fact, we debated and specifically rejected a minimum down-payment standard for the Qualified Residential Mortgage.

First-time homebuyers make up 41 percent of the home-buying population and, for many, saving for a down payment is the largest barrier to buying a home. In 2010, the average market value of a first-time buyer’s home was $184,091, according to the National Association of Home Builders. If the regulators require a 20 percent down payment to be eligible for the Qualified Residential Mortgage exemption, for example, borrowers would need to save a $36,818 down payment in order to get the lower interest rates and consumer protections of a Qualified Residential Mortgage. For many potential homebuyers this is simply out of reach. It is also unnecessary. An analysis of loan performance over the past decade proves that low down-payment homebuyers, when properly underwritten, have a relatively low risk of default when compared to the high-risk products and underwriting standards that led to the market meltdown. Simply put, a large down payment is not the most effective gauge of whether or not the borrower will pay their mortgage. This is precisely why prudent underwriting was at the center of our amendment.

The Dodd-Frank legislation outlined a framework that specifically ensured the inclusion of low down-payment loans in the Qualified Residential Mortgage, provided they have mortgage insurance or other credit enhancements that reduce the risk of default. We asked for this because research shows that including mortgage insurance on low down-payment loans reduces the frequency of borrower default, as well as the severity of losses incurred by lenders.

The purpose of the Qualified Residential Mortgage is to create a clear framework for high-quality underwriting and safe loans that will attract private investment capital back into the mortgage market. As regulators draft a responsible framework to support our nation’s housing recovery, they must provide an incentive for lenders to originate prudently underwritten loans while avoiding increased costs to homebuyers. Arbitrarily tossing in a new requirement for a large down payment will hinder, rather than help, that effort.

Isakson spent more than three decades in the real estate industry.