Most banks want to securitize loans made to borrowers buying homes with little money down. Did we learn nothing from the financial crisis?
In an attempt to fix some of the problems that caused the housing bubble and financial crisis, banking regulators are coming up with new mortgage lending rules that will address what lower-risk quality mortgages should look like. The goal is to let lenders sell so-called "qualified residential mortgages" to investors without having to retain the risks.
The question the Treasury Department must now answer is what makes a qualified mortgage? Regulators including the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency are pushing for a 20% down payment on such loans. While the big banks like Bank of America (BAC) and JP Morgan Chase (JPM) have not formally weighed in, their lobbyists at American Bankers Association and the Mortgage Bankers Association say that requirement is far too high and would price many buyers out of the housing market.
The debate will have broad implications for how homebuyers finance their mortgages. During the housing boom, many Americans took out home loans with little to no money down. When prices fell steeply following their mid-2006 peak, many borrowers didn't have enough equity to cushion the blow, leading to record foreclosures nationwide. Meanwhile, the big banks and investors holding these risky loans suffered huge losses.
Joseph Pigg, vice president and senior council of the ABA, says the 20% proposal is much too narrow and he worries it could further hamper demand for homes, especially when the fragile real estate market is still recovering. And while a heftier down payment generally reduces the risks of a loan, he says, other factors such as income, credit score, and the property's location determine the quality of a loan.
But perhaps it's time to question whether homeownership should even be part of the American Dream. Tighter mortgage lending rules could return the housing market to the way it was in the 1970s, when homeownership was much lower and virtually all homebuyers put down at least 20% of the value of the house. Standards began changing around the 1980s as home prices appreciated significantly and mortgage financing became more sophisticated.
It's easy to see why bankers would gripe about the 20% minimum. Smaller loans translate into smaller profits, and a smaller market for securitized mortgages. And lenders can fully securitize only qualified mortgages -- any loans made without the designated down payment can still be sold, but the lenders would have to retain 5% of their value on their books.
Wells Fargo (WFC) is the one exception among the banks on this rule -- it's arguing for a 30% down payment for qualified mortgages. Wells executives call it skin in the game, but smaller lenders are calling it an unfair competitive advantage -- as one of the largest lenders, Wells would be able to tolerate more risk on its balance sheet from the many borrowers who won't be able to afford such a down payment.
Certainly a 20% down payment -- much less a 30% one -- isn't easy for many homebuyers, especially as unemployment stays unnervingly high. The average loan-to-value ratio for January 2011 was 73%, which means borrowers on average put 27% down, according to the Mortgage Bankers Association. But while home sales have started to tick up slightly, demand is mostly coming from cash-rich investors who are scooping up foreclosed properties at bargain prices, not from first-time buyers. Economist Paul Dales of Capital Economics recently pointed out that more than two-thirds of existing home sales since last summer were made to cash buyers or investors, while a mere 6% were sold to first-time homebuyers.
Maybe the answer isn't to give borrowers more leeway, but less. Given all we've learned in the years following the housing crash, perhaps a little time travel back to the 1970s might not be so bad. During the boom years, many lenders passed on their mortgages, including all of the risk, to speculative investors. That proved disastrous, leading to a banking crisis and a housing bubble that all too quickly went bust.
It will be painful to endure a longer, deeper housing crisis that could come from tighter standards. But do we want to relive the nightmare that got us here?
I'll believe corporations are persons when Texas executes one.: LBJ's Ghost
owner carry loan on ground . . . Paid off now. I paid cash for my house (single mobile) don't care who's not impressed or think it's a shack, I can afford my house payments and enjoy 80 acres too. PAID FOR
I have to crank up my own windows in my truck too, it ain't the snazzy model at all, in fact, AC and auto are the only two options it's got but it's a new 2011, reliable, and PAID FOR. Birdy to the banks.
in much of the world our idea of home loans do not exist in a similar form, large down payments and shorter loan periods are the norm.... This may lead to a change in how society works however as in many countries it is more commonplace for one to live with their parents until married and we may see a shift to that if mortgages require such a large down payment