Members of Congress, real-estate associations, and some civil-rights groups are pushing back against a plan from federal regulators that would mandate a 20 percent down payment from many would-be homeowners. The groups are headed toward an August 1 deadline for comment on a proposal that would create a so-called qualified residential mortgage (QRM), which would require homeowners to have a one-fifth equity stake in their residence—an investment (the thinking goes) that might make them less willing to give up the home in tough financial times.
The rule is under consideration as part of the Dodd-Frank Act, an effort to install financial reforms in the wake of the economic collapse of the past few years. It’s part of a plan to ensure that mortgage lenders retain 5 percent of the risk of each mortgage they make—a response to the problems created by banks selling off mortgage-backed securities. A QRM would shift the burden of risk retention onto the homeowner.
Opponents of the rule say it would shut many people out of homeownership. Mabel Guzman, president of the Chicago Association of Realtors (CAR), said that one study showed that, for a median-income family hoping to buy a median-income house, it could take 14 years to save up a down payment. “And that’s without saving anything for college, for retirement, or for anything else,” she noted.
A poll conducted by the National Foundation for Credit Counseling found that 50 percent of respondents said that they would never be able to save enough to make a 20 percent down payment. A report from the Coalition for Sensible Housing Policy claimed that increasing the standard down payment from 5 percent to 20 percent would lower the rate of defaults on mortgages by about three-quarters of one percentage point.
Opposition to the requirement has been voiced by U.S. Senators and Representatives, the Urban League, the NAACP, and others. The National Association of Realtors has signed more than 300 members of Congress onto a campaign to oppose the 20 percent standard. In Illinois, they are Representatives Daniel Lipinski (3rd District), Luis Gutierrez (4th), Jan Schakowsky, (9th), Robert Dold (10th), Randy Hultgren (14th), Timothy Johnson (15th), Donald Manzullo (16th), Aaron Schock (18th), and John Shimkus (19th). Representative Bobby Rush (1st) is not officially signed on, but his spokesperson, Renee Ferguson, said that he opposes the proposal. “He understands that it would have negative implications for the real-estate industry that is trying to recover, and also for young people starting out,” she said.
In a statement issued yesterday, Gutierrez said that requiring down payments at “such a high level will not protect the economy, but rather potentially keep qualified homeowners out of the market. . . . Bad mortgage standards contributed to the last crisis, but with the new Consumer Finance Protection Bureau in place, there is less need for a federally mandated high down-payment level to reduce badly underwritten mortgages.”
CAR’s Guzman, along with several legislators, has characterized the 20 percent proposal as an overreaction to the lax lending climate of the mid 2000s. “When we need jobs and economic recovery, this is like a de-stimulus,” she said. “Housing is a big piece of the [U.S.] economy. If you make it more difficult to have access to housing, you’re not helping the economy recover.”
The latest home price indices, released by S&P/Case-Shiller on Tuesday, introduced a new wrinkle into the discussion. According to the report, as of the end of April, Chicago-area home values had dropped 34.5 percent from their November 2006 peak. That means buyers who ponied up a 20 percent down payment five years ago have now lost enough home value that they have no equity stake in their residence.