Sunday, July 24, 2011
Christina Nuckols: Home loan rules could stifle market
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Christina Nuckols grew up in the Shenandoah Valley and worked at several newspapers in western Virginia, including The Roanoke Times, before moving to Richmond to cover state government and politics. After 14 years at the state Capitol, she returned to Roanoke in 2011 to become the editorial page editor. christina. firstname.lastname@example.org | 981-3377
From the RoundTable blog
I performed a small miracle this summer when I sold my first home. For my next trick, I plan to put 20 percent down on the purchase of my second home.
I don't say that lightly. I've suffered and whined to my lender, accountant and co-workers. I speed-dial my bank every few hours to check on my balance. If a new fee for accessing the automated call center shows up on your bank statement, it will be my fault.
Regulators at the Securities and Exchange Commission and other agencies believe most homebuyers should have to clear that 20 percent hurdle. I suppose I should agree. If I can do it, why shouldn't everyone have to make that stretch? But the truth is I couldn't have purchased my first house several years ago if that rule had been in place. I would have had to wait longer, and might still be saving up today, leaving a small army of attorneys, real estate agents, movers, home improvement retailers, handymen, landscapers and plumbers to look for business elsewhere.
Regulators aren't really trying to pick on homebuyers or kick the housing market when it's down. The proposed 20 percent rule is part of an effort to implement last year's Wall Street reform law. The law requires lenders to verify that a borrower can pay back the debt before approving a loan. It sounds laughable that we need a law to make sure that happens, but no one is laughing. Thousands of risky home loans were approved in past years and bundled into securities with deceptively high credit ratings. A flood of defaults nearly took down the nation's financial system.
The federal law says that lenders can't avoid responsibility when they make bad loans. They must have "skin in the game" in the form of a 5 percent ownership in risky loans, requiring them to have adequate capital available in case of default.
In their attempt to sort out the bad loans from the good ones, regulators proposed that any loan in which the borrower puts down 20 percent or more would be considered a "qualified residential mortgage." In other words, those loans would be treated as safe and thus exempt from the capital requirements. Borrowers who can't come up with that much cash would face higher interest rates and other barriers.
Some housing experts say the negative effects of the rule are being exaggerated. It would not apply to the Federal Housing Administration, Fannie Mae or Freddie Mac, but those government-run lenders already have their own underwriting standards, and there is a move afoot to reduce FHA participation in the market.
Many banks, real estate agents and consumer groups oppose the 20 percent rule. They argue it's unfair to middle-income families who would have to come up with $30,000 for even a modest home of $150,000, and that doesn't include closing fees.
The Center for Responsible Lending, a North Carolina nonprofit that advocates for homeownership and consumer reforms, objects to even a down payment requirement of 10 percent.
"If you arbitrarily draw a line in the sand, you will have unnecessarily made the cost of buying a house much, much more expensive for millions of credit-worthy people," said spokeswoman Kathleen Day.
The nonprofit estimates that a police officer with a salary of $55,620 needs nine years to save up for a 10 percent down payment plus closing costs on a $172,900 home. A teacher earning $33,530 would need 14 years. The group didn't calculate the waiting period for journalists. Do banks even make 30-year loans to octogenarians?
The Center favors regulations that ensure borrowers are properly vetted, Day said, but she adds that low down payments were never the root cause of bad loans in the past. The problem was that unscrupulous lenders didn't even check a borrower's employment, income, debt level or history of prompt payment on bills.
I can testify that most lenders today are checking all that and more, and I'm glad they are. But if they demand a massive up-front sum on every loan, young families won't be the only ones who get shut out of the market. Those of us thinking about graduating to a second or third home will wait a long time for a buyer to knock on our door.
The public comment period on the proposed regulations ends Aug. 1. Anyone wishing to weigh in can do so at www.sec.gov/rules/proposed.shtml. Look for the Credit Risk Retention rules.