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Future home buyers would have to put 20 percent down to get the best home loans. Eligible borrowers could owe only a minimum amount of other debt. And anyone with a 60-day delinquency in his credit history need not apply.
New proposed rules to avoid another mortgage meltdown could radically change the way people buy homes.
Reformers say new standards are needed to ensure that buyers aren’t ensnared in mortgages they cannot afford and that lenders are held to account for loans that go bad.
But critics say the rules would increase mortgage costs for millions of borrowers and sideline thousands more from buying a house. Potentially hardest hit: First-time buyers with little cash and current owners whose home values have fallen, depleting the equity they might have built up.
“People are going to be priced right out of the market under these requirements,” says Mark Quarry, director of government affairs at the Cincinnati Area Board of Realtors, one of numerous real estate, banking and affordable housing groups opposing the rules.
“The impact on the housing market and economy at large would be enormously devastating.”
The rules would have wide implications in the region, where more than 80,000 families are in some state of foreclosure and more than one in 10 current owners owe more on their houses than their properties are worth.
Longer range, new barriers to buying homes could stall an already stagnant housing market. Experts say that home building, real estate and related markets for big-ticket housing items will continue to suffer as long as consumers struggle to buy and sell homes. No one expects a full recovery from recession until the housing market pulls out of its slump.
New rules could be finalized any day – or take months. Federal regulators from six agencies are reviewing hundreds of comments on the proposal since sharing details this spring.
Supporters of tighter standards say they’re needed to avoid another mortgage mess that just led to the biggest wave of foreclosures since the Great Depression.
“This is an effort to force lenders to make higher quality loans,” says Gary Clayton, professor of economics at Northern Kentucky University. “Regulation is called for because we abused the system before.
“There may be a little bit of over-regulation coming out of this, but in this case, over-regulation might be better than under-regulation.”
The proposed new mortgage rules are included among thousands of pages of proposals that resulted from Dodd-Frank regulatory changes passed last year by Congress.
The goal is to avoid past practices that fueled the housing bust and boom by allowing lenders to make risky loans, bundle them into mortgage-backed securities, sell them to investors – and escape liability when they defaulted.
“That’s how we got into this trouble,” NKU’s Clayton says. “If the loans ever went bad, the originators didn’t have to deal with any of the risk because they sold (the loan) off as quickly as they could.”
Under the proposed new rules, the best mortgages would be reserved for buyers who make 20 percent down payments and whose overall debt is less than 36 percent of gross income. In addition, a qualified buyer’s housing debt could not exceed 28 percent of gross income, and his credit history would have to be nearly perfect.
Borrowers who currently are 30 days late or more on any payment wouldn’t qualify. Neither would those whose credit history includes a 60-day delinquency within the past two years.
Homeowners who are refinancing would have to have 25 percent equity in their homes to receive the best rates.
Lenders could still write mortgages for buyers who don’t meet the new standards. But lenders would have to set aside 5 percent of those loans in cash reserves, cutting into their profits. The lender’s increased expense almost certainly would be passed on to borrowers with higher mortgage rates and costs for those loans.
Regulators say they examined data on the performance of 8.9 million fixed-rate loans originated nationwide from 2005 to 2008 – pulling out the features of those that performed the best – to write the proposed new rules.
Regulators argue that it’s OK if fewer loans meet the new standards. That’s because lenders will be competing for the increased number of non-qualifying borrowers, which in theory should keep the costs of those loans down.
Pittsburgh-based PNC Mortgage is among the industry’s few big players that support the proposed rules as written. More lenders should have to vie for non-qualified borrowers, it said in comments to regulators.
But many others in the industry disagree.
Charlotte, N.C.-based Bank of America has told regulators that the rule is more strict than the most conservative mortgage loans today. Costs would unnecessarily increase “to many safe, well-qualified consumers.”
Glen Corso is a spokesman for the Coalition for Sensible Housing Policy, which represents a broad range of 44 organizations including the American Bankers Association, the NAACP and the National Association of Human Rights Workers. His groups are lobbying against the rules as written.
“They should not be set at a point that they unnecessarily exclude people who have handled their credit and financial affairs responsibly, but haven’t been able to accumulate enough savings for a down payment,” he says.
Fifth Third Bank, among the region’s largest lenders, declined to comment.
It could take the average U.S. family – which makes $54,400 a year – at least 16 years to save enough cash to put 20 percent down on a $172,900 house, the national median price, according to estimates by the Coalition for Sensible Housing Policy.
In Greater Cincinnati and Northern Kentucky, families would need up to 10 years to save the $25,200 needed for a $126,000 home, the local median price.
“If a home buyer is working to save 20 percent, guess what? They’re making sacrifices somewhere else,” says Tom Hasselbeck, president-elect of the Cincinnati Realtor board. “It’s going to have a huge ripple effect.”
Families would be forced to consider big cuts to their education, auto, entertainment and other expenses, draining the economy in those sectors, Hasselbeck says.
In addition, the economy would lose out on the boost of additional spending that comes with buying a home – an impact estimated at $60,000 per sale, according to the National Association of Realtors. That sum includes income received by agents and mortgage brokers and money spent on furniture, moving and other factors.
Local borrowers could be hard-pressed to make 20 percent down payments. More than one of every five mortgage holders in Ohio are “under water,” or owe more on their homes than they’re worth. In Kentucky and Indiana, about one of every 10 homeowners are in similar shape.
“They have no equity to help offset a down payment if they’re looking to buy,” Hasselbeck says.
The alternative – a higher-priced mortgage – isn’t much better, he says.
Nationally, the average interest rate on a 30-year conventional loan is about 5 percent. But if the rules take effect as proposed, the rate could rise to 7 percent for loans subject to the higher lending costs, according to the National Association of Realtors.
The difference could amount to an extra $162 in the monthly mortgage payment on a $126,000 loan. Over the life of that loan, the difference in rates could add $58,300 to the cost.
It’s estimated that as much as 80 percent of new mortgages would be more expensive under the proposed rules, the national Realtors group says.
On the refinancing side, the picture is even less favorable.
Ohio ranks second, just behind Florida, for the most borrowers who have less than 25 percent equity in their homes.
An estimated 1.2 million mortgage holders – or 56 percent of all Ohio borrowers – fall below the proposed standard’s threshold for refinancing.
“This whole thing baffles me,” says Kathleen Day, a spokeswoman for the Center for Responsible Lending, a research and policy non-profit based in Washington, D.C.
“Low down-payment loans did not cause the housing bubble and ensuing recession,” she says. Risky lending practices and lax rules in writing loans did, she says.
Day acknowledges that a substantial down payment helps reduce the risk that a loan will go bad because the borrower has more at stake in the loan.
But his ability to pay back the loan is a greater factor in reducing chances of default, she says.
“When you make sure people can afford the loan, you can really mitigate risk,” Day says. “We are not advocating for no down payment loans, but if we arbitrarily say it’d going to be 10 or 20 percent, you will make home buying really expensive, unnecessarily for millions people.”
One exception to the new proposed rules would be loans guaranteed by the federal government, including those insured by Federal Housing Administration (FHA). They would continue to operate as today, exempt from the extra costs.
FHA loans require a down payment of only 3.5 percent. They’re meant to help buyers like 30-year-old Erica Baron, who is one month away from closing on a two-bedroom home in Anderson Township.
She was pre-approved for a $100,000 loan, then searched for more than year for a house she could afford
Baron is able to put roughly 1 percent down on her FHA loan for $75,500, and she’s taking out a loan from the Ohio Housing Finance Agency to help meet her 3.5 percent requirement.
“If I had to put 20 percent down, I would never be able to buy a house,” she says.
Many are concerned that if the new rules take effect as proposed, more borrowers will turn to FHA.
The impact could overstretch the already undercapitalized insurer and hinder the return of the private sector into the mortgage market, Corso says.
“Part of this reform is to have a robust private mortgage finance system with a somewhat limited government presence,” he says. “Instead, what this would do is create a permanent, largely expanded role for FHA going forward because it would be the only realistic alternative for borrowers.”
Experts say the nation’s foreclosure crisis was caused by risky underwriting that permitted interest-only house payments and other so-called “exotic” loan features. Among practices that became common: Monthly balloon payments that started small, then suddenly increased beyond the borrower’s ability to pay as interest rates rose.
The risk was compounded, experts say, by other loose lending practices that failed to verify buyers’ incomes or hold unscrupulous mortgage brokers accountable.
The new rules would prohibit any of those features from being included in the best mortgages.
Without that security, the nation is poised to repeat the massive mistakes that fueled the mortgage fiasco, Gray says.
“The point is we’re not asking everyone to come up with 20 percent,” he says. “We’re in this mess because we sold homes to people who should have never bought a home. I’d rather see slower, healthy growth, as opposed to fast and dangerous growth.”
Between now and the first quarter of next year, official word is expected to land from the six regulatory agencies charged with oversight of the new rules.
They include the Federal Reserve, Federal Deposit Insurance Corp., Federal Housing Finance Agency, Securities and Exchange Commission, Department of Housing and Urban Development and the Office of the Comptroller of the Currency.
The rules would become law one year after they are officially published.
LaVaughn M. Henry, vice president and senior regional officer for the Federal Reserve Bank of Cleveland, says he can’t comment on how the final rules might look.
But some experts have no doubt of their potential impact.
Should the rules land as written now, the economy “will be hit with a double whammy,” says John Glascock, economist and director of the University of Cincinnati’s Real Estate Center. “There’s no question that this would restrict home buying and slow down the economy. It would do the opposite of what good economic policy should do, and we’ll have many more years of instability.”