What do you think the forthcoming QRM down payment requirements should be?

  • 20%. (35%, 95 Votes)
  • 10%. (35%, 95 Votes)
  • 5%. (31%, 84 Votes)

Total Voters: 274

The Consumer Financial Protection Bureau (CFPB) announced new qualified mortgage rules that:

  • prohibit loans approved with no or minimal buyer documentation (no/low doc loans);
  • prohibit deceptively low teaser rates; and
  •  submit loans to rigorous underwriting standards.

These rules will take effect in January 2014.

first tuesday insight

The qualified mortgage was envisioned to protect the market from bubbling out of control again due to Wall Street financing. But it is the qualified residential mortgage (QRM) that will ultimately ensure consistent market stability for years to come.

Although their names sound similar, the differences are significant.

The new qualified mortgage rules focus on underwriting standards. Prior to the housing crash, it was assumed that lenders would regulate themselves. Surely, regulators reasoned, a self-interested lender would not offer a loan to a woefully unqualified applicant. But you know what they say about assumptions.

This was the standard before the secondary mortgage market became the world’s mortgage dump heap ­— a place for Wall Street to easily unload the toxic waste it was creating. In the era of originate-to-distribute, the quality of an applicant was always trumped by quantity. We were endearing homeownership, you understand.

These new underwriting standards seem like common sense, but it has become necessary in the wake of the Millennium Boom to spell these things out.

On the other hand, the rules that will govern the QRM (which have yet to be released) will outline controversial down payment requirements for loans receiving the best interest rates. Down payment requirements of 10% and 20% have been suggested.

Historically, a 20% down payment is always best. It demands buyers have sufficient skin in the game. Homebuyers with a significant down payment invested in their home are less likely to default since:

  • the more they have invested, the more they have to lose, a consideration imposed when buying a home; and
  • they are more likely to retain a positive equity in a typical business recession.

The over-abundant availability of low- and no-down payment loans was mostly to blame for the size of the most recent boom and bust, the financial accelerator at work. Homebuyers were simply handed a mortgage, no questions asked. When they were unable to continue making payments or home prices returned to the mean, they defaulted en masse. After all, they had no down payment invested to lose and no obligation to pay — so why not?

On the other hand, a 20% QRM standard means first-time homebuyers who do not choose Federal Housing Administration (FHA)-insured financing will have to save longer for their down payment. This should rightly concern agents, as it forces many potential homebuyers to either delay purchasing or take out an expensive non-QRM. Eventually, however, the demand for housing will stabilize as everyone’s expectations adjust to saving for that home they will purchase.

first tuesday is in favor of a phased-in QRM. Rather than overwhelming the recovering real estate market with full-blown standards right away, a gradual introduction of the QRM starts by requiring a 5% down payment. As employment levels increase, the minimum down payment standard is increased.

Eventually, the down payment will reach the ideal 20% in seven to ten years when the economy’s potential has fully recovered from this financial crisis. This achieves the long-term goal of greater housing market stability during future recessions. In the process, the short-term lack of qualified buyers is avoided.

Related:

The 20% solution: personal savings rates and homeownership

What do you think the new QRM standards should be? Share your thoughts in the comments below!

Re: New Mortgage Rules Left Out Down Payments from The New York Times