Is home buying getting more difficult?
April 27, 2011
If selling your home and downsizing or refinancing your existing mortgage is part of your retirement planning, your plans could be affected by a behind-the-scenes debate going on in Washington these days.
The QRM debate and why you should care
The debate focuses on something called "qualifying residential mortgage," or QRM, which is a new set of mortgage financing rules in which only home buyers who can put at least 20 percent down on a conventional 15- or 30-year loan would get the best available current mortgage rates or refinance rates. Everyone else would have to get their loan from a broker who would be required to maintain 5 percent of the risk from that loan--along with cash reserves to cover a default--and that additional cost will be reflected in a higher mortgage rate for the borrower.
The proposed QRM rules, which aren't expected to go into effect until 2012, also will require borrowers getting the best current mortgage rates and best refinance rates meet certain strict debt-to-income ratios. For instance, under one proposal, the best current mortgage rates would only go those buyers who are spending no more than 28 percent of their gross monthly income on housing expenses. Not many homeowners can look at their checking account and make that claim.
Why are stricter standards on the horizon?
These proposed new rules are part of the Dodd-Frank financial reform law, which aims to reduce the kind of free-money style of mortgage lending that led to the housing market collapse. In those days, borrowers could easily borrow more than they could afford without putting much money down or even verifying their income, and the result has been the flood of foreclosures that have sent housing prices into a death spiral the last four years.
Banks and mortgage brokers were able to hand out all that money because they were able to sell the loan to Wall Street and Fannie Mae and Freddie Mac and thereby dodge any risk from a default. This made financial institutions pretty indifferent to the balances in their borrowers' checking account or savings accounts; financial institutions made their money by closing the deal, and if you stopped making your payments on the mortgage, well, that was someone else's problem.
But Dodd-Frank proposes that financial institutions making these loans keep some "skin in the game" by requiring them to set aside 5 percent of loan balances in reserves to handle default losses even if they've sold the loan. Under the proposed new rules, the only loans exempt from this requirement would be the ultra safe QRM loans in which the borrowers have their own skin in the game to the tune of a 20 percent down payment. In return for that investment, those borrowers will get the best current mortgage rates while everyone else will be looking at mortgage rates up to 3 percentage points higher.
Homes harder to get
While these new proposals promise to make widespread loan defaults less likely, they are also expected to make it tougher for many people to buy a home. According to Slate magazine, 47 percent of the homebuyers who borrowed money to buy a home in 2009 put down less than 10 percent. Under the new rules, all those people would be looking at an interest rate higher than current mortgage rate.
And if you're interested in refinancing, you'll need a 25 percent equity stake to get the best possible refinance rates. According to the Washington Post, that equity stake will need to be 30 percent if you want to pull any money out, and you'll also need a very good credit history; if you were 60 days late on any credit account during the previous two years, you won't qualify for the best refinance rates.
Federal regulators will be hammering out the details of the new regulations in coming months, so expect to read more about them as banks, Wall Street, home builders, Realtors and everyone else linked to the housing market weigh in with their objections and recommendations.
But the bottom line for anyone who was planning to tap the equity in the homes for retirement is this: Even when the housing market finishes slogging through the glut of foreclosures, which have been dragging down the price of homes for several years now, don't expect prices to start suddenly rising to their previous lofty heights. The pool of potential buyers will be limited to those who can either afford a 20 percent down payment or an interest rate that is 2 or 3 percentage points higher than current mortgage rates.