May 12, 2011

Home-buying rule would hit recovery
By Johnny Isakson, Kay Hagan, Mary Landrieu
(As appeared in Politico)

Families are working hard to rebuild savings while the housing market remains unstable. Recent news from the Commerce Department shows that U.S. home builders continue to struggle despite signs of recovery in other segments of the economy. According to real estate data released this week, home prices in the first quarter of 2011 suffered their worst decline since 2008.

Yet banking regulators are dangerously close to issuing a rule that would put homes out of reach for many Americans and further cripple the fragile housing recovery.

More than a year ago, we worked together in a bipartisan effort to promote a sensible mortgage standard that would encourage sound underwriting and responsible lending. We introduced an amendment that exempted qualified residential mortgages from a requirement in the Dodd-Frank Wall Street Reform and Consumer Protection Act that would force originators to retain at least a 5 percent interest in loan pools, known as "risk retention," sold to investors.

It passed with overwhelming support. A rare coalition of consumer advocates and bankers embraced its objective: ensuring middle-class families can access sound, affordable mortgages.
But federal banking regulators last month proposed a 20 percent down payment requirement on QRMs. Regulators went for rigidity, rather than a balanced, flexible approach.

In contrast to our express intent — and despite repeated warnings from other members of Congress, consumer groups and bankers — regulators crafted a narrow definition that could unnecessarily slow the housing market recovery, increase costs to otherwise qualified homebuyers and dampen incentives for sound underwriting.

The 20 percent down payment requirement leaves millions of qualified potential homeowners with two grim alternatives: pay higher rates upfront for a mortgage that falls outside the regulators' proposed QRM standard or delay homeownership for a decade or more to save for an onerous down payment.

It is precisely this extreme outcome that we sought to avoid when we crafted the QRM provision.
It would take almost nine years for the typical American family to save enough for even a 10 percent down payment, according to 2009 data from the Center for Responsible Lending, and 14 years to save for a 20 percent down payment.

This punitive timeline needlessly postpones homeownership for responsible American families and lengthens the duration of our nation's housing woes. Homeowners lacking the 20 percent down payment could be charged excessive mortgage interest rates — perhaps as much as 3 additional percentage points.

These steep rates could put homes out of reach for families and drag down the nation's housing recovery.
A broad risk retention requirement might well deter certain practices that contributed to the financial crisis. But it is important that regulators also consider the significant costs to aspiring homeowners.

Studies have shown that when the sound underwriting features we included are applied to loans, lower down payment requirements have a negligible impact on default rates. But a rigid 20 percent down payment requirement could prevent 17 percent to 28 percent of American borrowers from qualifying for a QRM.

We cannot price millions of middle-class American families out of the housing market for an arbitrary and inconsequential default rate decrease. It is time for the regulators to go back to the drafting table.

Sen. Kay Hagan (D-N.C.) is on the Senate Banking, Housing and Urban Affairs Committee and the Small Business and Entrepreneurship Committee. Sen. Johnny Isakson (R-Ga.) is on the Senate Committee on Health, Education, Labor and Pensions and was in the real estate business for more than 30 years. Sen. Mary Landrieu (D-La.) is chairwoman of the Senate Committee on Small Business and Entrepreneurship and a senior member of the Senate Appropriations Committee.