Hefty down payments block path to homeownership for communities of color

 

Cedric Ricks, Communications Associate, National Fair Housing Alliance,

Every family should have a chance at achieving the cornerstone of the American Dream – homeownership in a safe neighborhood of choice.  But the path to success is destined to hit a dead end for millions in the American middle class and within communities of color if a proposed rule change designed to promote safe mortgage lending ends up making a 20 percent down payment the new norm for home purchases.

The proposed rule change is drawing fire as a bevy of regulators sort out a provision embedded in the historic Dodd-Frank Wall Street Reform and Consumer Protection Act known as the “qualified residential mortgage” or QRM. If they adopt the rule as proposed it could choke off credit and limit homeownership to all but the wealthiest Americans.

The result would be especially devastating to African-American and Latino families, who traditionally have fewer resources when purchasing a home, and would rob communities of color of an important tool for building wealth, promoting upward economic mobility, and easing a troubling racial disparity in asset ownership.

The National Fair Housing Alliance believes the provision is bad public policy which is overly broad and will needlessly harm communities of color when there are far less discriminatory ways to ensure our housing market is safe and that the excesses of the past decade – predatory lending, unhealthy growth in the subprime market, sloppy underwriting and abusive loan terms – are not repeated in the future.

Millions of Americans leverage home equity to pay for college for their children, start or expand businesses, pay for retirement or to pass along wealth to their loved ones. But a 20 percent down payment on a median sales price of a single-family home – about $172,100 – would require the average American family to boost its annual savings rate from 5.8 percent to 7.5 percent annually for a 14-year period, according to the Center for Responsible Lending.

That’s an exceedingly long time for anyone to save for a down payment, and it is based on families not putting any funds away for college, retirement or other expenses. For Latino and African-American households, to accumulate that down payment, they would have to save at an even higher rate: 9.9 percent and 11.5 percent, respectively, according to the CRL. Mortgage loans may still be available to borrowers who can’t meet the new down payment requirements, but it is not clear how readily they’ll be available, or at what cost.

Building a high down payment into the QRM penalizes whole segments of American society – African-Americans, Latinos and much of the white middle class – who might not be able to afford an excessive down payment, but are creditworthy and can afford a monthly mortgage for a home.

It’s important to note that the Dodd-Frank Act was designed to prevent a repeat of the current housing crisis sparked by lenders and brokers that made risky loans, which were sold and packaged into securities and then sold to investors. Dodd-Frank requires the loan securitizer to keep some risk or “skin in the game” in the securities as an incentive to promote sound underwriting.

The QRM was intended to define the “squeaky cleans” or essentially risk-free mortgages, for which securitizers will not have to hold onto 5 percent of the risk. We agree with the idea that everyone involved in the mortgage finance system should have a stake in the success of the mortgages that are made, but this is not the right way to accomplish that goal.

When drafting Dodd-Frank, Congress considered, but ultimately rejected the idea of using down payment as a proxy for risk in the QRM rules. More than 320 members of Congress have signed letters voicing concerns about the proposed QRM rules being “unduly narrow” and supporting the use of much lower down payment loans that have mortgage insurance. Concern over the QRM is bipartisan.

The Center for Responsible Lending points out the obvious – low down payment loans have been a significant and safe part of the mortgage finance system for years. Between 1990 and 2009, more than 27 million mortgages were made with low down payments that did not carry the risky features found in subprime loans, according to the CRL.

Furthermore, the data shows there are other factors that are better predictors of risks than down payment that won’t exclude whole segments of the American population from the mortgage eligibility pool. Some of those factors are:

• Ability of the borrower to repay the loan
• Full documentation and verification of borrower resources
• Quality of the property appraisal
• Loan type (fixed rate or adjustable rate, interest only, balloon note, etc).
• Loan terms and conditions
• Loan servicing practices
• Strength of regulatory oversight

The proposed regulation has created a loosely bound alliance of consumer advocates, civil rights proponents, home industry and banking interests – each opposed to a hefty down payment for different reasons. Consumer advocates and civil rights advocates voice fair lending concerns and protections for homebuyers, while the home industry and banking interests fear a steep down payment will effectively kill efforts to reboot the nation’s home market.

An analysis of data from research firm CoreLogic Inc. on loans originated between 2002 and 2008 found that increasing down payments from 5 percent to 10 or even 20 percent had a negligible affect on default rates, according to a White Paper produced by the Center for Responsible Lending, Community Mortgage Banking Project, Mortgage Bankers Association, the National Association of Realtors, the National Association of Home Builders and Mortgage Insurance Companies of America.

The data on loans actually made in 2008 showed that increasing the down payment from 5 percent to 10 percent decreased defaults by 0.2 percent. Increasing the down payment to 20 percent lowered the default rate by 0.6 percent. Meanwhile, 8.4 percent of borrowers who got loans in 2008 would not have qualified if they had been required to put down 10 percent. If a 20 percent down payment had been required, 20.7 percent of those borrowers would have been kicked out, according to the analysis.

If excessively high down payments become the norm, it will perpetuate the dual credit market that has caused so much harm in communities of color. Loans guaranteed by the Federal Housing Administration (FHA) are exempt from the risk retention requirements of Dodd-Frank and will likely become the primary source of funding for African-American and Latino families, who would pay higher rates and fees under FHA than with a conventional loan.

And if the government carries out its stated goal of shrinking FHA’s share of the market by making those loans less attractive, even this option may not be available. The unintended consequence of this government effort to clean up the mortgage market would be to steer otherwise creditworthy borrowers in communities of color to less sustainable mortgage loans or lock them out of the market altogether. Such a result is discriminatory and would conflict with the federal Fair Housing Act. The harm the proposed regulation would cause far outweighs any of its intended benefits. Let’s abandon this approach to the QRM and adopt a solution that works for all Americans.