Proposed changes to home mortgage guidelines could have far-reaching and unintended effects on the housing market in north Minneapolis and communities across the country. Qualified Residential Mortgages, which have not gone into effect yet, would require lenders to adhere to certain standards when securitizing mortgages for the secondary market. There are a bevy of such possible new rules, but the most controversial of them would require homeowners to come up with 20% down in order to qualify for market interest rates.
David Stephens, president of the Mortgage Bankers’ Association, said the rules “could lead to ‘long-term rental entrapment’ for ‘large numbers’ of Americans who would need at least a decade to save for a 20 percent down payment.” According to the Heritage Foundation, only 16 percent of homebuyers in 2010 would have qualified for a mortgage if they had to come up with a 20% down payment. Contrast that with the American Dream Survey by Trulia, where 47% of renters who plan on buying a home in the next two years say that CURRENT down payment issues are the primary barrier keeping them from buying sooner.
Locally, Alex Stenback of Behind the Mortgage writes that we can have a relatively accessible housing market with easier access to loans based on credit, down payment, and other factors; or we can have a relatively risk-free housing market with higher credit, down payment, and interest rate standards. We can’t have both.
In my corner of NoMi, a 20% down payment requirement would mean a housing market that further stagnates. The median sale price in Hawthorne hovered in the $50,000 range in 2010. So far in 2011 it’s at $30,000, although several pending transactions at higher amounts are expected to bump that higher, and I believe that we’ll see 2011 end with prices near 2010 levels. The current median list price in Hawthorne is $65,000.
So in order to qualify for a decent mortgage in Hawthorne, home buyers would need between $10,000 and $13,000 down, plus closing costs. Who’s buying these kinds of homes in NoMi with that much down? Government and non-profit entities and landlords/speculators, that’s who. Even though we’re FINALLY getting new owner-occupants coming into our neighborhood on an increasing level, the proposed regulations would effectively kill that momentum.
When I tried explaining this to Representative Ellison’s office (one of the few times I’ve disagreed with his positions on such issues), the response was twofold: down payment assistance programs could offset the new rules, and banks want to make money so they’ll figure out a way to lend in poorer neighborhoods. My response was that 1) the assistance programs were created to have an impact on the current market conditions (and are finally doing that on measurable levels), and 2) banks generally DON’T make money on a $50,000 loan in Hawthorne. Furthermore, the applicants seeking such loans are often more challenged and so are the properties. The ratio of high workloads vs. low payouts is discouraging enough to mortgage originators already without new rules making that worse. On top of discouraging buyers from looking at housing in challenged neighborhoods, these proposed changes could make lenders less willing to take such risks.
My last conversation with Kris Nelson revolved around housing and foreclosure trends in north Minneapolis. New studies are expected to show that the foreclosures we are seeing now are tied more to joblessness and income issues and less connected to subprime or unnecessarily risky loan origination. Foreclosures are no longer the result of bad risks, but rather the poor state of the economy. And yet our government is trying to eliminate risk.
Further adding to the irony is that if these changes are implemented, the move will drive people to seek…wait for it…government-backed loans that do not have the same down payment requirements. And according to several bankers I’ve spoken with, the federal government is already concerned that it carries a disproportionate level of loans currently being originated.
So please contact your Senators and Representatives in Congress and tell them that the 20% down requirement will cause far more harm than good, and that it should not be implemented.
(Photo by John Hoff)