Mandatory Down Payment on Mortgages Still Up in the Air

Will we see a mandatory 20% down payment on mortgage loans in 2013? Probably not. But a lower mandatory down payment, say, 5% or 10%, seems possible at this point. The very idea of it has mortgage lenders holding their breath — and lobbying with their collective might.

In the summer of 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act, or H.R. 4173. It was the most sweeping set of financial reforms since the Great Depression, with more than 1,400 pages of proposed rules and requirements.

Among other things, the Dodd-Frank Act introduced a concept known as the qualified residential mortgage, or QRM. A qualified residential mortgage loan is one that meets certain standards that are designed to reduce risk. The final definition is forthcoming, but it will likely incorporate many of the risk-reducing features of the similarly named (and recently finalized) qualified mortgage, or QM.

Lenders will have a strong incentive for making QRM-compliant loans. They can sell them into the secondary mortgage market without limitation.

According to the Dodd-Frank Act:

“a [mortgage] securitizer is not required to retain any part of the credit risk for an asset that is transferred, sold or conveyed through the issuance of an asset-backed security by the securitizer, if all of the assets that collateralize the asset-backed security are qualified residential mortgages…”

In other words, lenders do not have to keep QRM loans on their books.

Mandatory Down Payment: Facts, Rumors and Fears

What does QRM have to do with mandatory down payments on mortgage loans? So far, nothing. In fact, the words “down payment” only appear once in the full text of the Dodd-Frank Act, and only in a historical sense. There is nothing in the legislation that ties the QRM standard to a certain down-payment amount.

So why has this subject been making headlines for well over a year? Here’s what started the debate:

“These underwriting standards include, among other things … a maximum loan-to-value (LTV) ratio of 80 percent in the case of a purchase transaction (with a lesser combined LTV permitted for refinance transactions); a 20 percent down payment requirement in the case of a purchase transaction…”

This quote comes from the Notice of Proposed Rulemaking published by federal banking regulators in March of 2011. This is the match that lit the fuse of controversy, complaint and lobbying. Though this was only a proposal (and there’s a wide chasm between proposal and passage, when it comes to federal laws), it did signal the desires of regulators to impose a 20% down-payment rule for purchase mortgages. It’s right there in black and white.

But here’s where the confusion comes in. Stay with me now. This proposal is for the qualified residential mortgage (QRM). The Dodd-Frank Act says that the QRM rules should be “no broader” than the previously published qualified mortgage (QM) rules.

Specifically, Dodd-Frank says that banking regulators “shall define that term to be no broader than the definition ‘qualified mortgage’ as the term is defined under section 129C(c)(2) of the Truth in Lending Act.”

We already have a definition of QM. It was finalized and published by the Consumer Financial Protection Bureau in January 2013. And there is no mention of a down-payment requirement anywhere within those rules. So how can the QRM go beyond this to impose a down-payment requirement? It’s still an unanswered question, at this point.

Group Wants to Merge QM and QRM

The Coalition for Sensible Housing Policy (a group that includes consumer organizations, civil rights groups, and — yes — mortgage lenders) is now pressing for simplification of these rules. They want the QRM rules to be “synched” with the recently introduced QM rules.

It seems that dropping the ‘R’ would do the trick. But matters of government are rarely that simple.

The coalition commented on mandatory down payments in a 2013 recent press release.

“Low down payments alone were not the cause of the crisis,” said Julia Gordon, a coalition member and Director of Housing Finance and Policy at the Center for American Progress. “With appropriate underwriting and borrower support, low-down payment lending can be extremely safe and provide families with the opportunity to own homes in stable communities and build wealth for future generations.”

Presumably, appropriate underwriting in this context would mean verifying the borrower’s income and ability to repay the loan, which is also now required by law.

Is it time to hand out the headache pills?