Are the Days of Low-Down-Payment Over?
For the past year, we’ve been discussing the potential impact of the Dodd-Frank law, especially the risk retention guidelines.
As covered in the December issue of the DocuTech newsletter, under the law lenders will have to retain five percent of every loan originated, except for those which meet the definition of “qualified residential mortgages” (QRM).
The agencies responsible for drafting the rule, which includes U.S. Department of Housing and Urban Development (HUD), the Treasury Department, the Federal Reserve, the Department of Veterans Affairs and the Department of Agriculture, are reportedly close to releasing a proposed draft of the QRM.
According to The Wall Street Journal, the bank regulators will release the draft by the middle of March. Within the draft, it is being reported that the regulators will push for the final rule to require that exempt purchase loans contain a 20 percent down payment from the borrower.
The WSJ adds that, “One proposal would also require borrowers to maintain a 75 percent loan-to-value ratio for refinances, and a 70 percent loan-to-value for cash-out refinances in which the borrower refinances into a larger loan, according to people familiar with the matter.”
What is unknown is if these proposals will include any provisions to account for mortgage insurance.
The move to require a 20 percent down payment represents a major philosophy shift from the past couple of decades when Washington pushed the idea that every citizen should be able to become a homeowner.
Of course, down payment amounts are not the only factor affecting the QRM. The regulators are also considering income standards, length of the loan and whether adjustable rates will be included.
For lenders, the challenge will be in deciding how to comply with the rules. For those lenders unable or unwilling to raise the extra capital, the available loan products will be very limited. For others with access to the needed capital, the market for loans that are proven performers outside of the narrow limits of the QRM will become less crowded, but more expensive to fund.
Ultimately, the end result of the rule is far from finished. We won’t know all of the details until the proposed rule is released later this month. Then the rule will be subject to a public comment period and examination by Congress.
The industry needs to remain active in shaping how it will be regulated. Once the public comment period begins, send in your comments and contact your local representatives to express your concerns.
If there is going to be dual levels of loans, loan documents and compliance checks will need to clearly establish which loans meet QRM. Here at DocuTech, we will be watching the developments closely so that we can ensure that your precision document packages will always contain the documentation you need for every loan.