Center for Responsible Lending Issues a Brief on Potential Negative Impact of a Government Mandated 10 Percent Down-Payment

Date Published 9/14/2012
Author Marja Hoek-Smit
Country United States

The Center for Responsible Lending, a US independent non-profit policy think-tank focused on abuses in consumer lending, has issued a brief to warn against adopting a US government mandated 10 percent down-payment as part of the “Qualified Residential Mortgage” requirements. “Federal regulators are currently debating how to define “Qualified Residential Mortgages” (QRMs), a category of home loans established by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 <QRM Legislation>. Under Dodd-Frank, mortgage lenders that sell their loans into the private secondary market must retain a portion of the loan’s risk unless the loan is designated as a QRM.” “Non-QRM loans” will likely be significantly more expensive than QRM loans – estimates range from 80 to 400 basis points, depending in part on what happens with other parts of the risk retention rule. The content of this rule will, therefore, have enormous implications for the cost and availability of mortgages.

Loans with risky product features such as high fees, balloon payments, low teaser rates, or interest-only or negative amortization schedules will automatically be ineligible for QRM status, as will loans that do not verify borrower income (so-called “no-doc” or “low-doc” loans). The Center for Responsible Lending (CRL) supports these restrictions. CRL is warns, however, against imposing a mandatory 10 percent down payment requirement. It argues that such a rule would exclude creditworthy families from homeownership, and would undermine the nation’s economic recovery by further depressing the housing market. The report documents the following five points:

Low down payment loans are not the same as subprime loans and have been successfully used to help families become homeowners for decades.

Arbitrary minimum down payment requirements would lock middle-income families out of the mainstream market and widen the wealth disparities that already exist between whites and communities of color.

The high costs of a 10 percent down payment requirement far outweigh sparse marginal benefits (i.e., a small reduction in default rates).

The benefit of down payments in reducing individual borrowers’ default rates could be counteracted by the toll it would take on the larger housing market and economy.

CRL concludes that while recognizing that down payments affect defaults, down payment thresholds should be set and priced by the market, not by the government. <CRL Report>

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