Regulators push 20% down payments on mortgages

[Redlinerobert]

I understand that these new rules will not apply to Freddie/Fannie conforming loans. But the conforming loan limits are coming down soon (from $729K to $625K in CA). Speaking with some industry folks today, I understand that the industry is trying to water down these rules. But it's unclear if those efforts will be successful. If these new rules go into effect, mortgage loans with less than 20% downpayment will go the way of the dinosaur. So if you're considering buying a home with a value of more than $625K, I suggest waiting. There could be a serious slide in the higher end of the market if these new rules go into effect because the pool of eligible buyers will shrink considerably.

Regulators Push 20% Down Payments on Homes

By VICTORIA MCGRANE And NICK TIMIRAOS

Banking regulators are pushing for mortgage-lending rules that require homeowners to make minimum 20% down payments on loans classified as lower-risk, according to people familiar with the matter.

The proposal is being floated as a way to rewrite the rules for mortgage lending to prevent a rerun of the housing bubble and financial crisis that resulted from years of easy credit. The Dodd-Frank financial overhaul law enacted last year enabled regulators to define a so-called gold-standard residential mortgage that would be exempt from costly new rules.

At least three agenciesthe Federal Reserve, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currencyback a proposal to require home buyers to put down at least 20% of the sales price in order to obtain one of these "qualified residential mortgages." One proposal would also require borrowers to maintain a 75% loan-to-value ratio for refinances, and a 70% loan-to-value for cash-out refinances in which the borrower refinances into a larger loan, according to people familiar with the matter.

Mortgage-finance giants Fannie Mae and Freddie Mac would also be exempt from the rules while they remain in conservatorship, according to these people. The U.S. took over the firms in 2008, and the Obama administration has proposed eventually winding them down.

The behind-the-scenes debate over the proposal could have far-reaching implications for how Americans finance loans, because it addresses how much equity new borrowers should have in their homes.

It is unclear whether the proposal will garner support among other regulators and be acceptable to the White House and Congress. Altogether, six federal agenciesthe three supporting the proposal plus the Department of Housing and Urban Development, the Federal Housing Finance Agency and the Securities and Exchange Commissionmust sign off on the proposal before it is released for public comment. It could not be determined Tuesday whether all the agencies would support the 20% down-payment standard.

At a congressional hearing Tuesday, HUD Secretary Shaun Donovan said no deal has been reached yet, and that any plan could instead spell out options.

At a separate hearing Tuesday, Treasury Secretary Timothy Geithner said, "We've got to be careful that we get it right." He added, "I'm not sure how much longer it's going to take, but it's going to take a bit longer than we initially expected."

Meanwhile, some lawmakers expressed concerns that the new rules might make it too hard for homeowners to qualify for less risky, and less costly, loans.

Sen. Kay Hagan (D., N.C.) told Federal Reserve Chairman Ben Bernanke that several lawmakers "are really concerned about not making it so restrictive that we can't have as many well-qualified loans as possible."

The proposal was crafted in response to a provision in Dodd-Frank that aimed to improve mortgage-lending standards. Loans that don't meet the standards for "qualified residential mortgages" and are sold to investors as securities will be subject to a "risk retention" rule, which could raise borrowing costs for homeowners.

The risk-retention rule requires banks to keep 5% of the value of all mortgages they securitize on their books. During the housing boom, many lenders passed on all of their mortgages, and all of the risk, to investors. It was designed to force lenders to have "skin in the game" when selling groups ofmortgages packaged as securities.

Critics of the risk-retention rule said it could raise costs for traditionally safer lending products such as long-term, fixed-rate loans with full income documentation. A coalition of consumer advocacy groups and the real-estate industry have warned that defining the rule too narrowly could raise borrowing costs for millions of creditworthy borrowers.

Regulators must issue a rule defining "qualified residential mortgages" by April, and had initially planned to publish a draft proposal late last year. But the process has been delayed by a disagreement about whether to include in the rule national standards for loan servicers, such as how to modify loans for troubled borrowers. The new proposal reflects a compromise among the regulators to include some standards for how and when banks modify loans.

[Nice_Bass]

Most of what is coming out in this new Dodd bill is absolute BS from both a lending and consumer standpoint. With the GFE changes of last year to even the way loan officers will be paid under the new regulations changing, the borrower has never once been the priority. It is a CYA approach by the gov't at this point.

Non-conforming loans and jumbo loans have always had their own set of rules. Anything fha, fannie, or freddie are merely adjusting their guidelines, or adjusting their risk; i.e. April 18 FHA monthly premiums are raising again along with the upfront mortgage insurance.

If we keep letting strictly a reactionary congress/committees and attorneys rewrite lending here in the US it will be most unfortunate.

Long story short, it was actually fun and responsible for a couple of years...but that looks to be pretty well past at this point.

I forgot to add...but as far as the watering down of this bill is exactly what I am hearing.  Reason being is the new costs created by actually monitoring and enforcing this monster will be outrageous...for the taxpayer it protects...

[flechero]

I think 20% is reasonable.  If you can't make a down pmt, you aren't ready for the house. IMO.  Maybe I'm just conservative. 

This protects the lender in case of a downturn...  I believe they have some recent data to suggest that is a good move.  :

[South FLA]

What do you expect from Dudd, I mean Dodd.

[roadwarrior]

From the same guys that brought you "No Doc Loans".

How's that working out?

[Redlinerobert]

From the same guys that brought you "No Doc Loans".

How's that working out?

Exactly my point.  I'm glad someone gets it.

[J Francho]

So if you're considering buying a home with a value of more than $625K, I suggest waiting.

A problem I'll never have, LOL.

[=Matt 5.0=]

So if you're considering buying a home with a value of more than $625K, I suggest waiting.

A problem I'll never have, LOL.

That makes two of us.

[Root beer]

The proposal was crafted in response to a provision in Dodd-Frank that aimed to improve mortgage-lending standards. Loans that don't meet the standards for "qualified residential mortgages" and are sold to investors as securities will be subject to a "risk retention" rule, which could raise borrowing costs for homeowners.

So homeowners with shaky income will be subjected to higher interest rate? Or because now bank has to retained some of the security they sell, and as result they're going raise the cost as a result of higher risk since they're holding a measly 5% of the loan?

Meanwhile, some lawmakers expressed concerns that the new rules might make it too hard for homeowners to qualify for less risky, and less costly, loans.

What constitute as a less risk or high risk loan for borrowers? If the cost is the interest rate, what is the risk? If the homeowners meets requirement why is he subjected to same interest rate as say a person that don't meet the same requirement?

[skunked_again]

i bought a house that was twice as much as i needed. that said i have a 3 car garage thats 28 feet deep.

BOOM!

[hookingem]

i bought a house that was twice as much as i needed. that said i have a 3 car garage thats 28 feet deep.

BOOM!

And you have 2 darn nice boats! Must be nice. 

[soccplayer07]

I think 20% is reasonable. If you can't make a down pmt, you aren't ready for the house. IMO. Maybe I'm just conservative.

I have to disagree. 20% down especially for first time home buyers is extremely difficult and even rare in some areas. The average sales price in my market is $450,000. 20% down is $90,000 plus closing costs in some situations. That is very tough for some buyers.

[J Francho]

You realize, we're talking 20% down on a house that is $626K?  Not many 1st time buyers in that market.

[flechero]

I didn't read the article, I just responded to the 20% down.

soccplayer07- If that's the case, why not buy a smaller house or rent a few years while you save... like our parents and grandparents did. Instant gratification and buying too much house turned into foreclosure for 100's of thousands of people in the last couple years.

No one ever said it was or should be easy... look at our entire generation vs our parents and grandparents... most us of started out (buying a house) comparable to where our parents left off... so as a "kid" I bought what my parents worked up to over 40 years. They had equity, low payments (due to good down payments) and never took on more than they could handle if things went south.

Being able to affording something shouldn't just be determined by whether you think you can swing the monthly payments.

[key chain bass guy]

I didn't read the article, I just responded to the 20% down.

soccplayer07- If that's the case, why not buy a smaller house or rent a few years while you save... like our parents and grandparents did. Instant gratification and buying too much house turned into foreclosure for 100's of thousands of people in the last couple years.

No one ever said it was or should be easy... look at our entire generation vs our parents and grandparents... most us of started out (buying a house) comparable to where our parents left off... so as a "kid" I bought what my parents worked up to over 40 years. They had equity, low payments (due to good down payments) and never took on more than they could handle if things went south.

Being able to affording something shouldn't just be determined by whether you think you can swing the monthly payments.

Where were you six years ago when I needed you?  That was perfectly stated.  I did exactly as you described.  While I am able to pay the mortgage, we have had to cut back on a lot of other intangibles that I would love to do.

[flechero]

While I am able to pay the mortgage, we have had to cut back on a lot

That is the definition of "house poor". 

We downsized considerably, to avoid being house poor... as both my wife and I had to find new jobs last year.

key chain bass guy- you might enjoy Dave Ramsey.  It was by following his plan that we took firm control of our finances.

[GLADES]

You realize, we're talking 20% down on a house that is $626K? Not many 1st time buyers in that market.

Same goes for second time buyers that lost their original down payment equity. I bought my home in 2003, 10% down. It will be impossible to sell house #1, profit the 20% down and reinvest into a larger or nicer home for at least a few more years, if ever.

In south Florida, there are thousands of homes in foreclosure, devaluing the market.

The 20% rule will not move all those homes.

[South FLA]

I just self financed a gentleman that had an excellent credit score and he had 20% down on a second vacation home. The place appraised for 310K I sold it to him for 285k. Long story short he could not get approval ANYWHERE with 20% as a secondary home and did not have anymore money, so I ended up financing for 5 years at 6.25% adjustable after 5. Point is that if even people with excellent credit cannot get financing the housing market will be awash in inventory and housing needs to come down even more.  This is was in Florida of course, not sure about California and other states.  How is it on the left coast Redline?

[Lund Explorer]

I'm still trying to grasp the idea of spending$625K for a house. 

Case in point is a property that sold just down the road from us.  78 acres mostly mixed hardwoods with a 22 acre lake smack in the middle of it.  Two story home of approx. 2,700 sq. ft. with a walkout basement (unfinished at time of sale), 4 BR 2 1/2 bath.  Had a two car attached garage and a 32x40 12' high garage/workshop as well.  House is relatively new as it was built in 2001.  It was located on a gently sloped hill leading down to the lake where a dock and small boat house was located.

Also, the property sits at the end of a deadend road is is surrounded on two sides by a large privately held property with extremely limited access.  The other two sides abut a fairly large developement.  The property has numerous deer and turkey hunting opportunities as all of the surrounding properties are closed to hunting.

The Price?  $369k!  To me, this place had everything that an outdoorsman could have wanted.  I can't imagine what you would have added to it to bump up the price by another $150k.

[tyrius.]

The Price? $369k! To me, this place had everything that an outdoorsman could have wanted. I can't imagine what you would have added to it to bump up the price by another $150k.

Simple, put it in a different state!!!   ;D

[Glenn]

You nailed it.  In my neck of the woods, that property would be a few million.

[QUAKEnSHAKE]

I just self financed a gentleman that had an excellent credit score and he had 20% down on a second vacation home. The place appraised for 310K I sold it to him for 285k. Long story short he could not get approval ANYWHERE with 20% as a secondary home and did not have anymore money, so I ended up financing for 5 years at 6.25% adjustable after 5. Point is that if even people with excellent credit cannot get financing the housing market will be awash in inventory and housing needs to come down even more. This is was in Florida of course, not sure about California and other states. How is it on the left coast Redline?

Well if he is left broke after the 20% down he doesnt need to be buying that 2nd home then. Sound like the bank did the correct thing.  We dont know how much he owes on the 1st house payment per month, his income, if he has other dept but the bank must and made the call. Just from the highlighted statement have to agree with bank.

Last score of mine I checked was 830 I could put %30 on a 300K house but the monthly payment and property taxes for another house would bankrupt me.

Prop taxes on 300K here is $9000/y

[J Francho]

I think 20% is reasonable. If you can't make a down pmt, you aren't ready for the house. IMO. Maybe I'm just conservative.

I have to disagree. 20% down especially for first time home buyers is extremely difficult and even rare in some areas. The average sales price in my market is $450,000. 20% down is $90,000 plus closing costs in some situations. That is very tough for some buyers.

You'd be surprised what you can come up with, in a relatively short period of time, as long as you set goals.  I was able to save up 15% in about 18 mos., and I'm super glad to have that lower monthly payment.  Its good to have a cushion, things come up when owning a house.

[Lund Explorer]

You nailed it. In my neck of the woods, that property would be a few million.

I understand, but land isn't ask expensive up here.  Even waterfront is as bad as some other places I've seen.

The picture below is a lakefront home.  5,000 sq. ft., 5 Bedrooms, 5 full and 2 half bath.  Full log and stone construction.  It's been on the market for just over one year.  Original price was $1.3M now reduced to $995k.

This is NOT typical for our area, as I can tell you that the homes on either side of this place are probably valued in the $300k range.  Quite a few smaller waterfront homes are in the $200k range in this county.

[Redlinerobert]

I just self financed a gentleman that had an excellent credit score and he had 20% down on a second vacation home. The place appraised for 310K I sold it to him for 285k. Long story short he could not get approval ANYWHERE with 20% as a secondary home and did not have anymore money, so I ended up financing for 5 years at 6.25% adjustable after 5. Point is that if even people with excellent credit cannot get financing the housing market will be awash in inventory and housing needs to come down even more. This is was in Florida of course, not sure about California and other states. How is it on the left coast Redline?

I don't thnk it matters what coast you're on....home financing has become quite a bit more difficult, as it should.  However those that have good credit and good job history are getting loans.  It's just taking longer to obtain.

You'd be surprised, at how many buyers we deal with that are paying all cash for their home purchases.