Downpayment plan may price buyers out of market

WASHINGTON – July 6, 2011 – Policymakers have been disputing a key element of the mortgage market: How much downpayment should a buyer have to purchase a home? Some recent federal regulators and lawmakers are calling for a 20 percent or 10 percent downpayment in order for mortgages to be considered a “qualified residential mortgage” not subjected to extra fees.

However, such stringent downpayment requirements could price many homeowners out of the housing market, argues a growing number of consumer housing advocates, including the National Association of Realtors® (NAR). Many creditworthy homebuyers in occupations that don’t pay high median salaries might have to wait a decade or longer to meet the downpayment rule.

The Center for Responsible Lending, which has argued that 10 percent or 20 percent downpayment requirements are too high, has a chart on its web site showing the length of time it would take borrowers of different occupations to save enough for a 10 percent downpayment on a 2010 median-priced $172,900 home.

▪ U.S. Army Staff Sergeant: 16 years (median salary: $30,176)
▪ Public school teacher: Nearly 15 years (median salary: $33,530)
▪ Firefighter: 10 years (median salary: $47,730)
▪ Police officer: Nearly 9 years (median salary: $55,620)

“We’re not advocating for zero percent down,” Kathleen Day, spokesperson for the Center for Responsible Lending, told The New York Times. “We think downpayments are good. But we think the market should set them, based on the underwriting.” (The borrower’s credit history and income and debt levels.)

The downpayment proposal comes as part of new rules for mortgage lenders in the Dodd-Frank law. Federal agencies are trying to set criteria for what should be considered a reasonably safe qualified residential mortgage (QRM). If banks adhere to the standard, they’ll be allowed to sell the mortgage loan to investors and avoid retaining any of the risk.

Lenders that don’t adhere to the QRM standards must retain at least 5 percent ownership of the loan, which makes the transaction riskier. For borrowers who are unable to meet QRM, they would have to pay more for their loans because lenders would have to boost interest rates on their loans to cover the extra costs.

Federal Housing Agency loans would be exempt.

Lawmakers have extended the public comment on the new downpayment rules to August.

1. The REALTOR® Action Center has issued a call for real estate professionals to help ensure their clients have access to affordable mortgages. To send a letter to your state lawmakers, visit REALTOR.org.

Source: “What’s a Reasonable Home Down Payment?” The New York Times (June 29, 2011) and REALTOR® Magazine online

© Copyright 2011 INFORMATION, INC.

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