Forthcoming regulations could make conventional mortgages more expensive to the wide swath of homebuyers and owners who can't put 20% down, depressing originations and potentially undermining the housing recovery.
If 20% down becomes the standard for "qualifying residential mortgages," nearly half of all current homeowners with a mortgage, and 70% of first-time homebuyers would not make the cut, according to the data firm CoreLogic.
Under the Dodd-Frank Act, lenders will have to retain 5% of the credit risk of any non-QRM home loan they securitize. Therefore, whether or not lenders held such loans in their portfolios, they'd have to hold capital against them — a cost that's apt to be passed on, in the form of higher mortgage rates, to borrowers without 20% equity.
"The economics just don't work," said Cameron Findlay, chief economist at LendingTree, a unit of Tree.com Inc. He estimates that rates for low downpayment loans could rise as much as 3 percentage points. "We think the housing market would be hurt through the endorsement of a mandatory downpayment."
Six federal agencies are expected to issue a proposal next month defining QRMs as having at least 20% equity from the borrower.
The rule could drive more borrowers to seek Federal Housing Administration loans, which still allow downpayments as low as 3.5% and are exempt from the risk-retention rule. Such an influx would further increase the government's already-sizable involvement in the mortgage market.
"It does seem like it would put taxpayers on the dime for losses on those mortgages that go to FHA," said Ellen Schloemer, an executive vice president at the Center for Responsible Lending, a housing advocacy group.
But the FHA, whose market share has swelled in recent years as other low downpayment products went away, may not welcome the additional business. David Stevens, the departing FHA commissioner, had said one of the agency's goals was to shrink its market share to let the private market fill the void.
"The concentration would significantly expand and move over to FHA at the same time that regulators are trying to reduce FHA's current 30% share of the market," Findlay said. "They are trying to figure out a way to adopt this change without crushing the market." He pointed out that the agency has already raised its annual premiums and that in September, higher loan limits will take effect that also will exclude some borrowers from getting FHA loans.
Housing economists are still crunching the numbers, but CoreLogic's preliminary estimates show that 2.7 million borrowers last year put down less than 20% to buy a house. The Santa Ana, Calif., data firm estimates that 10.8 million current borrowers with outstanding mortgages have loan-to-value ratios above 80%, while another 11 million homeowners owe more on their mortgage than their home is worth.
Sam Khater, CoreLogic's senior economist, said the typical household today has more debt than in the past, and asking borrowers to come up with additional cash would disproportionately affect the hardest-hit foreclosure states of Nevada, Arizona and Florida.
