Unreleased Mortgage Down-Payment Rule: Housing Industry Braces for Impact

By Gretchen Wegrich

As the mortgage industry sifts through thousands of pages of new mortgage rules issued this past week by the Consumer Financial Protection Bureau (CFPB), the jury is still out on whether US regulators will establish a minimum down payment for mortgage loans.

Previous attempts to set a down-payment requirement forcing lenders to keep a stake in mortgages with down payments of less than 20 percent drew strong resistance. Protestors complained that creditworthy borrowers would be unfairly barred from the market.

Regulators expect the finalized version of the Qualified Residential Mortgage rule to be released in the coming months. In combination with other new regulations governing underwriting and servicing, the Qualified Residential Mortgage rule will reshape who can lend and who can borrow. Banks are expected to make only the loans that meet the new CFPB standards.

“These changes will impact business operations and the future of mortgage access for years to come,” said David Stevens, president of the Mortgage Bankers Association, in a speech on Jan. 16 in Washington.

Calling the new rules a “regulatory tidal wave,” Stevens said his organization was overwhelmed by calls and emails from members who were trying to understand the new regulations.

The fine print

The Qualified Mortgage rules released Jan. 10 by the CFPB requires lenders to verify borrowers’ ability to repay their loans and offers legal protection for lenders who follow safe mortgage practices. The rule is a hefty 804 pages.

Under the Qualified Mortgage rule, there is no requirement for a minimum down payment. For the six regulatory departments drafting the new Qualified Residential Mortgage rule, deciding whether to include a minimum down payment requirement –and whether to make it less than the original proposal of 20 percent --has become a focal point of the regulatory process.

Risk factors

While requiring a zero percent down payment is an attractive feature for enticing borrowers, it is a major factor in creating high-risk mortgage loans.

However, proponents of the minimum down payment requirement disagree on what this number should be.

Calling down payment size “the major credit-risk driver in mortgages that are untouched by the Qualified Mortgage rule,” Karen Shaw Petrou, managing partner of Federal Financial Analytics in Washington, suggested the minimum down payment requirement should be set at 10 percent instead of 20 percent. The lower number would be “the politically expedient course to take,” Petrou said.

Other lawmakers suggested a down payment requirement of 5 percent would be sufficient if private mortgage insurance was responsible for part of the risk on loans with less than a 20 percent down payment.

 On Jan. 17, the Consumer Financial Protection Bureau released an additional 1600 pages of regulatory requirements for mortgage servicers, including a provision which limits foreclosures while borrowers are in the process of negotiating a loan modification.

Other servicing rules introduced include requiring servicers to provide clear mortgage bills that warn borrowers before their interest rates adjust. The servicing rules and Qualified Mortgage rule will be fully in effect beginning January 2014.

Too many rules?

Mortgage industry insiders such as David Stevens of the Mortgage Bankers Association expressed concern that the complexity of the servicing rules could lead to unintended consequences. Housing market stability and mortgage rates may be at stake.

The danger, Stevens said, was forcing “a second correction in the housing market by creating a regulatory clampdown on fully sustainable homeownership because too many people haven’t really dissected the deep nuances of these rules.”

Mortgage credit is already available to only the upper echelon of credit holders. According to data released by Ellie Mae, a California mortgage software company, borrowers whose loans closed during 2012 held an average credit score of 748, placing this group in the top 37 percent of American credit holders.

During 2012, the average downpayment was 21 percent. The average interest rate of a 30-year fixed-rate mortgage was 3.9 percent, said Ellie Mae.  

Overview

The full effect of the new mortgage industry regulations will become known once all of the rules are released. The industry is awaiting the release of rules structuring loan officer compensation and mandating simplified loan documents.

Additionally, new international capital standards will take effect by 2019 under stipulations of the Basel III accord.

Gretchen Wegrich

Gretchen Wegrich is an editor at Lender411. She specializes in mortgage basics, personal finance and green living. She graduated with a bachelor's degree in writing from University of California, San Diego and previously worked at the Santa Cruz Sentinel. Contact her at gretchen@lender411com.