The newly proposed QRM definition offered by the government addresses four main issues:

• Type of mortgages that would qualify
• The ratios between a purchaser’s income and their payment/overall debt
• The amount of down payment which should be required (20% is being proposed)
• The minimum FICO score for a borrower

The National Association of Realtors (NAR), the Center for Responsible Lending (CRL), the Mortgage Bankers Association (MBA), the National Association of Home Builders (NAHB), the Community Banking Mortgage Project and the Mortgage Insurance Companies of America (MICA) issued a white paper on the subject titled: Proposed QRM Harms Creditworthy Borrowers and Housing Recovery

The paper only challenges the potential down payment requirement (eventually the organizations will address the remaining three conditions in updates to this original white paper). Let’s look what the report says:

In the midst of a very fragile housing recovery, the government is throwing a devastating, unnecessary and very expensive wrench into the American dream. First time homebuyers will have to choose between higher rates today or a 9-14 year delay while they save up the necessary down payment…

High down payment and equity requirements will not have a meaningful impact on default rates. But they will require millions of consumers, who are at low risk of default, to either put off buying a home or pay unnecessarily high rates. The government is penalizing responsible consumers, making homeownership more expensive or simply out of reach for millions. We urge regulators to develop a final rule that encourages good lending and borrowing without punishing credit-worthy consumers.

Will Higher Down Payments Substantially Decrease Defaults?

The report actually studies the impact a higher down payment would have had on the default rates of loans written from 2002 through 2008. The report states:

They actually break it down:

…moving from a 5 percent to a 10 percent down payment on loans that already meet strong underwriting and product standards reduces the default experience by an average of only two- or three-tenths of one percent… Increasing the minimum down payment even further to 20 percent… (creates)  small improvement in default performance of about eight-tenths of one percent on average.

Will Higher Down Payments Impact a Buyer’s Ability to Purchase?

The white paper looks at three separate areas the proposed QRM would impact:

1. The reduction in eligible buyers caused by an increase in down payment
2. The time it would take to save a 20% down payment
3. The cost of financing for a non-qualified mortgage

1.) The reduction in eligible buyers caused by an increase in down payment

As it did when looking at defaults, the paper studies the impact a higher down payment would have had on buyer demand from 2002 through 2008. The breakdown:

…moving from a 5 percent to a 10 percent down payment on loans that already meet strong underwriting and product standards…would eliminate from 7 to 15 percent of borrowers from qualifying for a lower rate QRM loan. Increasing the minimum down payment even further to 20 percent, as proposed in the QRM rule, would amplify this disparity, knocking 17 to 28 percent of borrowers out of QRM eligibility.

2.) The time it would take to save a 20% down payment

This section of the report was eye-opening. Here is the time it would take a family to save for the newly suggested down payment.

Based on 2009 income and home price data, it would take almost 9 years for the typical American family to save enough money for a 10 percent down payment, and fully 14 years to save for a 20 percent down payment. A 20 percent down payment requirement for the QRM means that even the most creditworthy and diligent first-time homebuyer cannot qualify for the lowest rates and safest products in the market. Even 10 percent down payments create significant barriers for borrowers, especially in higher cost markets. This will significantly delay or deter aspirations for home ownership, or require first-time buyers to seek government-guaranteed loan programs or enter the non-QRM market, with higher interest rates and riskier product features.

3.) The cost of financing for a non-qualified mortgage

Remember, the QRM does not set mandatory requirements for ALL loans. What it does is define the loans that are deemed less risky. The less risky loans will not add additional costs to the banks issuing them. Loans that are not eligible for this category will still be written but at a greater expense to the purchaser to cover the increased costs to the banks. How much greater? According to the study:

(T)oday’s 5 percent market would become an 8 percent interest-rate market. While that estimate may be high, even a one-percentage point increase in interest rates could be devastating to a fragile housing market. According to estimates from the National Association of Home Builders, every 1 percentage point increase in mortgage rates (e.g., from 5 percent to 6 percent) means that 4 million households would no longer be able to qualify for the median-priced home. A 3-percentage point increase would price out over 12 million households.

Bottom Line

Loan qualifications needed to become more stringent than they were five years ago. There is no argument about that. However, the QRM seems to set a down payment requirement (20%) that has a minor impact on default rates yet a major impact on a purchaser’s ability to buy. We should look long and hard at this issue before deciding.

Reposted with permission from my friends at Keeping Client Matters.