One of the many themes running through the interactive session “The Future of Mortgage Finance in America,” this morning at NCRC’s annual conference was the question of how to get to sustainable homeownership.
Despite the best efforts of John Taylor to broaden the conversation, much of the discussion revolved around the lightning rod of the definition of the “qualified residential mortgage,” which would be a mortgage so purportedly safe that the lender wouldn’t be required to keep the 5 percent risk retention on their books under Dodd-Frank.
The current proposed definition, which Jared Bernstein, an economist in the office of the vice-president, was careful to reiterate (and reiterate) was (1) open to comment right now and (2) a proposal of independent regulators, not the administration, includes a 20 percent downpayment.
Throughout the this conference, as well as the National Low-Income Housing Coalition conference a couple weeks ago, there is near universal agreement that that standard is not only unworkable, but dangerous. Though the intent was to merely carve out a small exception to a universal risk retention standard, that’s won’t be its effect. Lenders, said John Taylor, see it not as a goal post, but as a “bright line,” and it will create a dual mortgage market with vastly different terms and accessibility for those who can get QRMs and everyone else.
(Indeed, lawmakers are considering lowering it to 10 percent after testimony from a wide range of people opposed the 20 percent mark. As reported today, Rep. Jeb Hensarling, R-Texas, said, “Any time you get the mortgage bankers, the mortgage insurers, the Center for Responsible Lending and Congressional Black Caucus to agree on something, maybe this committee should pay a little bit of attention.”)
Statistically, risk does increase with smaller downpayments, but the effect of downpayments is dwarfed by credit history, debt to income ratio, and a host of other factors, argued several participants, including Mark Zandi, chief economist of Moody’s. If we have gotten rid of the exotic products, predatory terms, and lax underwriting, they said, smaller downpayments should not be a big enough problem to cause concern.
Bernstein, while not taking a position on what downpayment standards should be, seemed skeptical of the overwhelming negative response on the panel to the idea of QRMs. While he acknowledged that we there is a danger of overcorrecting, he said several times that we need to remember how we got here, and he feared that undercorrection is also a concern.
One thing that didn’t get mentioned by anyone, however, under the theme of “sustainable homeownership,” is the fact that even before the current crisis, only 50 percent of low-income, first-time homeowners were still homeowners five years later. Homeownership is difficult for many low-income people. There is not necessarily a golden age of pre-predatory lending to go back to as Marc Morial of the National Urban League seem to be suggesting this morning.
And, as Emily Thaden of Vanderbilt University noted in her presentation later in the day on the low foreclosure rates in community land trusts, you need to be a homeowner for 5 to 9 years to start to realize the economic benefits of it.
Now, that doesn’t mean that the answer is actively restricting entrance to homeownership through these QRM standards and creating a dual mortgage market. But it does mean that, as Alan Mallach has recently suggested in a paper for the Philly Fed, that we might want to focus our policy efforts on ways to make homeownership sustainable rather than just on getting more people into it. Plenty of low-downpayment loans made through community development programs, shared-equity forms of tenure, IDAs, — “high-touch” programs, with extensive pre- and post-counseling work and stewardship in many other forms — have tremendous track records.
These programs are certainly not the only answer, but they should have a role in the discussion, so that the two points in the conversation are not just “We need to restrict homeownership” and “Things will be fine if can get access to credit with sound underwriting.”