Once in a while, I get a big reminder why I didn’t want to join the NAR — it’s behaved rather like a clueless cheerleader for the housing market since before I got into the real estate industry.
Like many of you, I just received an email from the NAR urging me to join its fight against new regulations governing Qualified Residential Mortgages (QRM). Technically, a QRM is simply a high quality mortgage that the legislators under the Dodd-Frank Act will accept as being safe enough to be sold on the secondary markets. The most important criterion is to have borrowers put 20% down on the purchase.
So, why should our government even bother to come up with these new regulations on mortgages accepted by the secondary market? Simply, they’ve learned after the popping of our most recent housing bubble that government sponsored entities (GSE) like Freddie Mac and Fannie Mae end up taking all the risk from deteriorated lending standards, even if private secondary investors also participate to a limited extent. Hence, they’re trying to avert another relapse into an unstable housing market environment by re-establishing the 20% downpayment rule that we’ve all grown up with.
Obviously, with a 20% downpayment requirement for QRMs, that would exclude plenty of first-time home buyers from cheaper loans, including a few of my own clients. But, with the FHA and other agencies providing alternatives, non-QRMs are still readily available. The NAR wants us to believe 1) that this new hurdle will devastate housing markets as only 40% of current purchases meet the requirement and 2) that a whole bunch of different mortgage products should be exempt as being traditionally safe. It even goes as far as to claim that it has “evidence” that high downpayments have less to do with reducing lender risk than good lending practices. It had similar “evidence” 4-5 years ago that housing prices weren’t being overinflated by bad loans.
Frankly, I’m aghast at the appallingly self-interested sham arguments from the NAR. First, it’s the loss of the 20% downpayment requirement in early 2000 that led to a broad loosening of lending standards. With the government’s encouragement, lenders accepted ever lower downpayments, from 10% to 5% to 0% to eventually negative downpayments by rolling in closing costs into a 100% loan. By then, we could all see that the lending had gone insane and that only a few buyers were unfairly benefiting at the cost of the public. Even today, buyers only paid 20% down if they had the conviction to do so.
Second, it’s the original 20% downpayment requirement that has been around for decades which gave us all those great historical charts of stable housing price growth and exceptionally low default rates. Yet, the NAR wants us to continue defying recent experience and reference that historical data for less than 20% downpayments. Are we really that incredibly gullible to keep believing that message? We all saw how it created a crisis of epic proportions with a total mismatch of lending risk profiles against historical practices.
Third, a solid downpayment is about the best evidence you can get for a low credit risk. Credit applications can be manipulated to conform to whatever “good lending” standards we put in place. With all the mortgage fraud still gutting the capital reserves of mortgage lenders and the GSEs, we cannot afford to accept anything less for such cheap loans.
And, when the NAR claims that “it would take 14 years for a typical person to save up a 20% down payment to buy a median-priced home”, maybe it should re-evaluate its mis-guided extrapolation of historical trends. People are saving more today than in the last few decades and should be able to save a downpayment much faster than that.
Buying a house is a privilege, not an entitlement. That’s why home-ownership is an American Dream. It’s a goal that you work towards over many disciplined years. If you can’t save a 20% downpayment, then you’re probably not
credit responsible enough to support a 30-year commitment with a house. Some buyers are only looking to live in a starter home for a few years and can easily afford insured mortgage payments with a small downpayment. That’s perfectly fine. But, pushing for looser rules to allow people to buy with only 5% down without paying for higher risk-adjusted mortgage rates or insurance is just a recipe for further disaster in the housing market.