It is more than clear that the qualified residential mortgage will stifle access to home mortgages, but the Federal Reserve is pressing ahead with its campaign to ramp up the standard for down payments. The QRM is a part of the Dodd-Frank bill that implements a risk retention standard for loans. The idea is to make sure that borrowers have “skin in the game” when they take out a mortgage. The controversy stems from how high the Fed and the FDIC want to set the bar. They are seeking to require loans to have a down payment of at least twenty percent in order to become exempt from risk retention rules.
The Fed’s economists want to deleverage American households. They want to reduce the level of investment in housing. Putting pressure on down payments is a slow, year-by-year, home sale by home sale way of getting that done. We are overly leveraged. In 1955, household leverage (debt as a ratio of disposable income) was 55 percent. By 2007, it was 133 percent.
It will serve to keep housing prices down. It will mean fewer jobs for construction workers, timber producers, realtors, and other housing-driven fields. It may drive up interest rates for borrowers that cannot put down twenty percent. That will curb the ability of first-time homebuyers to get financing, and it will harm the prospects for people seeking to move up to a larger home.
Research published by economists a the Federal Reserve does not disagree with this assessment, although they often reveal that understanding in a somewhat opaque manner.
- More leverage meant faster price appreciation. [less leverage will reduce housing prices]
- subprime loans put pressure on housing prices. [prime lending will reduce housing prices]
- For each additional dollar in housing price appreciation, households took on 25 to 30 cents in debt through home equity loans. [future declines in housing prices will reduce consumption in other areas of the economy.]
- More leverage means more defaults. [take your medicine now and things will right themselves in a few years]
The message is clear – the Fed is willing to let housing prices weaken even further.
Even so, the QRM may not have the effect that the Fed hopes to see. It may even serve to increase the federal government’s exposure to the housing section. The QRM does not apply to loans sold to Fannie Mae or Freddie Mac. Loans with higher loan-to-value ratios would seem to be destined to go to the GSEs. Loans with the highest LTVs would continue to end up with FHA guarantees.
Downpayments are already higher than they used to be. CoreLogic says that sixty-one percent of home buyers put down at least twenty percent during 2010.