Tuesday, April 19, 2011

Leading House Republican Urges SEC to Drop 20% Down Payment Requirement from Proposed Risk Retention Rules

Conditioning the qualified residential mortgage (QRM) carve out from the risk retention rules under Dodd-Frank with a 20 percent down payment requirement contravenes legislative intent and would knock 20 to 25 percent of borrowers out of QRM eligibility, according to House Deputy Whip Tom Price (R-GA). In a letter to the SEC, he emphasized that Congress intended for a properly crafted QRM definition to provide incentives for the strongest underwriting, discourage bad lending practices, and restore investor confidence by bringing private capital back to the housing finance market. Rep. Price said that the mortgage asset risk retention regulations and the qualified residential mortgage exclusion from risk retention are particularly important for the stability of the United States housing market.

On a separate point, the House leader said that, because Dodd-Frank exempts government-guaranteed FHA lending from the five percent credit risk retention, it is essential to track the legislative language and include private mortgage insurance for any low-down payment lending as an element within the QRM standard. This provision was included in QRM to ensure that comparable treatment is afforded for prudent QRM loans backed by private mortgage insurance, he explained, just as it is for loans insured by FHA.

Rep. Price, a member of the Financial Services Committee, said that the proposed risk retention rules do not follow the clear intent of the Senators who introduced the QRM provision into Section 941 of Dodd-Frank. The 20 percent down payment was not an element of the QRM provision that passed Congress as part of Dodd-Frank. Rep. Price cited a letter from the sponsors, Senator Johnny Isakson (R-GA), Mary Landrieu (D-LA) and Kay Hagan (D-NC) expressing concern that efforts to impose a high down payment requirement for any mortgage to meet the QRM exemption standard would be inconsistent with legislative intent. The Senators said that the issue of whether the QRM should have a minimum down payment was discussed in negotiations during the drafting of Section 941 and it was decided to intentionally omit such a requirement.

According to Rep. Price, the omission of the 20 percent down payment requirement is particularly important because a low down payment is a critical element to stabilizing the housing market and can be done without inappropriately expanding risk. According to a new analysis of 33 million home loans originated between 2002 and 2008, boosting down payments in five percent increments has had only a negligible impact on default rates.

For example, moving from a five to 10 percent down payment on loans that already meet all of the other QRM standards reduces defaults by an average of only two or three-tenths of one percent, but eliminates anywhere from seven to15 percent of borrowers from qualifying for a lower-rate QRM loan. Increasing the minimum down payment to 20 percent would knock 20 to 25 percent of borrowers out of QRM eligibility, with only a small improvement in default performance of about eight-tenths of one percent. In the Deputy Whip’s view, it is hard to envision the recovery of the housing market with unnecessarily high down payment requirements under QRM. Moreover, this was never the intent of Congress.