The pendulum on home mortgage financing is swinging toward credit restrictions that could further imperil the housing market , a coalition of bankers and housing policy analysts said Wednesday.
Nevada would feel the impact of the proposed Qualified Residential Mortgage regulation, or "safe mortgages," in a way that's unrivaled anywhere else in the country, a spokesman for Washington, D.C.-based Coalition for Sensible Housing Policy told the Review-Journal.
Six federal agencies have proposed credit-risk retention provisions included in the Dodd--Frank financial reform act that would require homeowners to have at least 25 percent equity to qualify for a lower refinancing rate.
That wipes out 83 percent of Nevada homeowners, the highest percentage in the country, the coalition reported. It would raise refinancing costs for 482,068 Nevada homeowners who have less than 25 percent equity in their homes, based on data analysis from CoreLogic.
A lot of people will be priced out of the housing market, coalition spokesman Glen Corso said. Nearly 25 million homeowners across the country would face more expensive mortgages if the proposal goes unchanged, he said.
"Here we have an issue with civil rights groups, mortgage lenders, home builders, real estate agents, consumer advocate groups all saying that this is a deeply flawed proposal, particularly with regard to the down payment," Corso said in a conference call with mortgage executives. "That's generally why all these guys are against the proposal."
Homeowners who fail to qualify for a QRM loan could pay up to 180 basis points, or 1.8 percentage points, more in mortgage interest rate, said Cam Findlay, economist for Lending Tree.
That drives the payment up by $198 a month, or roughly 20 percent, on a $200,000 home with a 30-year, fixed-rate mortgage, he calculated.
Findlay said Las Vegas would be hardest hit because of the steep decline in home values, which have fallen 60 percent from their peak, and the huge amount of negative home equity.
"One of our concerns is the whole concept behind risk retention is to make sure people pay on their obligations," Findlay said. "By getting people to put equity down, it would encourage them to stay current on their payments.
"You'll see it's not necessarily the down payment that defines a consumer's ability to stay current,'' he said. "What defines it is the quality of underwriting the loan at the front end. Originating interest-only loans and loans with balloon payments is not sustainable for the long term."
Regulators need to be extremely careful about prohibiting access to loans by forcing a down payment on consumers, especially in this market, Findlay said. The potential "ripple effect" could cause more borrowers to default on their mortgages, further depressing home prices, he said.
Pete Mills of the Community Mortgage Banking Project said lenders have found ways to get around 20 percent down payments for decades, but it was done "safely" with proper income verification and 30-year, fixed-rate mortgages, not balloon payments and amortization. They were done with "common sense" and well-structured underwriting standards, he said.
As part of the financial reform legislation, Congress designed a clear framework for improving the quality of mortgage lending and restoring private capital to the housing market. To discourage excessive risk-taking, financial regulators are requiring securitizers to retain 5 percent of the credit risk on loans packaged and sold as mortgage securities.
Because across-the-board risk retention would impose significant costs on responsible, creditworthy borrowers, legislators also created an exemption for Qualified Residential Mortgages with sound underwriting standards that have been proven to reduce default.
"Rather than creating a system of penalties to discourage bad lending and incentives for appropriate lending, regulators have developed a rule that is too narrowly drawn," the Coalition for Sensible Housing Policy wrote in a 14-page report sent to Congress on Aug. 1. "Of particular concern are the provisions of the proposal mandating high down payments. Other aspects of the proposal -- such as the proposed debt-to-income ratios and credit standards -- will also raise unnecessary barriers for creditworthy borrowers seeking the lower rates and preferred product features of the QRM."
While the QRM was intended to help shrink government presence in the market, restore competition and mitigate the potential for further consolidation of the market, the proposed rule is likely to have the opposite impact, the report said.
Contact reporter Hubble Smith at email@example.com or 702-383-0491.