I applaud both the Obama administration and Congress for reacting to lessons learned in our current econmc crisis in order to prevent them from happening again. But there should also not be an over reaction to the housing crisis, one in which qualified buyers are priced-out from the market. Financial reform should not come at the expense of minorities and young adults who played no role in our housing crisis; both groups already are behind when it comes to asset wealth. Increasing the hurdles to homeownership for these groups is not the solution to our current problems.
The Dodd-Frank Wall Street Reform Act includes a provision calling for banks to retain 5% risk retention in loans sold on the secondary market. In theory this is great; forcing banks to keep some skin in the game could prevent some recent fraudulent practices. However, there is an exemption for loans that meet what is called a Qualified Residential Mortgage (QRM). The debate over the definition of the QRM will go a long way in determining the future of homeownership; placing high down payment requirements would price-out minorities and young adults who typically have lower assets available.
In the discussion surrounding the QRM, most of the debate has centered on the Loan-to-Value (LTV). There are two proposals that could be combined into one policy. The first would require potential homeowners to put down 20%, and the other is to put down 10% with mortgage insurance added to the mortgage. This isn’t to say that loans that don’t meet these qualifications can’t be made, but they would be made with much higher rates. Banks would push these QRM loans, as they would not have to retain any risks. Smaller banks, unable to withstand a shrinking mortgage market, would make the new “higher risk” loans at higher rates.
If these proposals are adopted, the face of homeownership could change. No longer could it be seen as a gateway to wealth, as only the wealthy would be able to afford it. The interesting part of this discussion is that it has brought together organizations that are typically on opposite sides. A group of Consumer Advocates and Industry leaders released a joint report stating, “First time homebuyers will have to choose between higher rates today or a 9- to 14-year delay while they save up the necessary down payment.” In the Mortgage Bankers Association’s testimony before the House Subcommittee on Capital Markets and Government Sponsored Enterprises they took the position that this would be an “insurmountable barrier to most first-time and low- and moderate-income borrowers achieving homeownership, notwithstanding that they otherwise may qualify for a mortgage.”
Recent studies have shown the wealth disparities in our country between whites and minorities. With these troubling numbers how can this debate not be seen as a direct target to minority communities? We can also place young professionals in this category. When we think about our young adults graduating from college, we see them on a progression: Get a great job, buy a house, and start a family. Young adults of all races would find themselves in the same categories as minorities. They will have a decision: Either pay higher rates today, or delay homeownership for up to 14 years. Is this the cost of financial reform? Is this an overreaction to the housing crisis? I say it is, and I am not alone. Advocates and industry that often battle are standing together on this issue. We are about to price-out qualified buyers from the market, which played no role in our housing crises. Is this the price we have to pay for financial reform? I hope not.
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