As federal regulators work out how to implement financial reform, they've been charged with defining which mortgages are "safe" enough to qualify as a government-approved Qualified Residential Mortgage (QRM), with favorable rates. This week a coalition of regulators — the Federal Reserve, the Department of Housing and Urban Development and the FDIC, among others — released their proposal for the new standards, and, well, it's striking a lot of people as a stunningly bad idea.
The rule would require borrowers to present a 20 percent down payment and limit their housing payments to no more than 28 percent of their monthly gross income. To give you some perspective: It would take the average middle-class family 14 years to save enough money for a 20 percent down payment.
Civil rights groups, including the National Urban League, have seized upon the proposed guidelines as an extreme measure that would effectively shut out the working class — and especially people of color, who generally have less family wealth — from ever becoming homeowners.
In an interview with the American Banker, John Taylor, CEO of the National Community Reinvestment Coalition, summarized the plan thusly:
"What has been proposed essentially creates a separate and unequal system of finance for people of color and for blue-collar, working-class people where regardless of your creditworthiness, of whether you're someone who has a great credit score and pays your bills on time and plays by all the rules, if you're not well-heeled enough to come up with 20 percent or if your household debt to income ratios are high … you're going to go into a separate and unequal category of financing where you're going to have to pay more."
Federally controlled mortgage entities, which back 90 percent of new mortgages, either would be exempt (in the case of FHA loans) or probably would be exempt (in the case of Fannie Mae and Freddie Mac loans), according to various news reports. However, some fear that such programs would be overwhelmed by mortgage seekers who can't put down 20 percent or meet the other proposed QRM requirements.
Furthermore, the rule punishes potential homeowners, regardless of their credit standing, without addressing the factors that contributed to the financial meltdown in the first place.
"Nobody wants to see a return to reckless and irresponsible lending, so the basic concept of trying to rein in the marketplace and have better oversight is a good one," Debby Goldberg, special project director for the National Fair Housing Alliance, told The Root. But she argues that the oversight should be over banks and predatory lenders who, among other dubious practices, fueled the high default rate by issuing dubious loans.
"We saw things like rapidly increasing interest rates, the whole low- or no-documentation approach and very little attention, by a great many lenders, to the borrowers' actual ability to repay the loans," she said. "There were a whole series of factors, and with that layered risk, we saw default rates that were through the roof."
Conversely, there's little correlation between the size of a down payment and default rates. In an analysis of 1 million loans written to highly creditworthy borrowers in 2006 and 2007, the National Community Reinvestment Coalition (pdf) found that the default rate was 0.14 percent for those with a 20 percent down payment, and 0.26 percent for those who put only 3 percent down.
"The whole down payment thing is more about how much wealth you have than anything," said Goldberg. "The impact of this is huge on people of color, where we already have a big disparity in homeownership rates and in wealth, which is very closely tied to homeownership. It would deepen the gap between the haves and have-nots in our country, and we really can't afford that."
But there is some promising news. After all the backlash, the agencies extended the comment period from Friday to Aug. 1, allowing more time for feedback on the issues — and for regulators to review that information before publishing a final rule. On the other hand, the extension is no guarantee that they will ultimately reconsider.
"I think they have heard the message from a lot of people that this is a problematic proposal," said Goldberg. "But I can't predict where the regulators will come out on this. We're hopeful that they'll heed that message … but who can say?"
Cynthia Gordy is The Root's Washington reporter.