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Federal regulations might hamper housing recovery

Real estate professionals, lenders critical of proposed loan requirements

If new federal rules are implemented as proposed, it will be difficult for many people to own homes, said Joy Daniels, owner of the Susquehanna Township-based Joy Daniels Real Estate Group. This home is for sale in York County. Photo/Submitted

A proposed regulatory change aimed at curbing bad lending practices might cripple a mortgage market still reeling from the 2008 collapse of the financial industry, local real estate professionals and lenders said.

“The housing market doesn’t need another kick in the butt,” said Bernie Campanella, a housing consultant with Swatara Township-based homebuilder Fine Line Homes and Realty and chairman of the Realtors Political Action Committee for the Greater Harrisburg Association of Realtors.

As part of the reforms in last year’s Dodd-Frank Act, six federal banking agencies have crafted proposed rules for what are to be called “Qualified Residential Mortgages.”

Dodd-Frank is a 2,300-page federal law that regulates financial institutions ranging from Wall Street to banks to mortgage lenders.

The criteria would require lenders to retain 5 percent ownership of loans they originate unless the qualified mortgage has a minimum down payment of 20 percent. The proposal also contains strict debt-to-income ratios and borrower credit history restrictions.

The intent may be to encourage banks to take a harder look at a borrower’s ability to repay the loan, but the proposal also would dramatically limit the pool of buyers just as the housing market is limping toward mild recovery, critics said.

“It’s going to make everything grind to a halt,” Campanella said, noting that the local market is already top heavy with listings.

In the first quarter of 2011, the average number of days houses remained on the market increased to 127, according to the GHAR, which monitors Dauphin, Cumberland and Perry counties. Average market days came in at 102 days in the fourth quarter of 2010 and 103 in the previous quarter, the association said.

The biggest concern is the first-time homebuyer segment, which makes up about 40 to 45 percent of the market, said Bill Pierce, a regional mortgage sales manager with Fulton Mortgage Co.

“The 20 percent down for everyone would cause a slowdown in real estate lending,” said Karl Krug, vice president of real estate lending for Members 1st Federal Credit Union, based in Lower Allen Township in Cumberland County. “Most consumers don’t have resources to save 20 percent.”

The market is in a slow recovery and the volume of buyers has dropped from where it was in 2010, he said, noting the federal homebuyers’ tax credit that provided an $8,000 incentive to first-time buyers until it expired April 30, 2010.

“I think it’s ridiculous,” Joy Daniels, owner of the Susquehanna Township-based Joy Daniels Real Estate Group, said about the down payment proposal. “It would be like a gut punch to the economy. I can’t imagine they think a 20 percent down payment would help economic conditions.”

Buying a home is the American dream, she said. If the rules are implemented as proposed, it will be difficult now for many people to realize that dream, Daniels said.

“That dream may never come true now,” she said, noting that 75 percent of her clients put less than 20 percent down. Most don’t even put down 10 percent.

Lost equity

Because having fewer buyers is likely to push resale prices down, many in the move-up segment and others looking to buy another home might lose the equity they need, Daniels said.

“Most people need to sell for a reason, so prices will be cut and they will lose equity,” she said.

The rate of foreclosures also could become an issue. And if fewer people are buying, tax collection might drop, Daniels said.

“It’s not just real estate; it’s going to affect the title and the lenders,” she said. “It’s a never-ending cycle of disaster for years to come.”

Daniels and others said they understand what regulators are trying to accomplish. But they have gone too far to prevent another financial meltdown, they said.

The Pennsylvania Housing Finance Agency, a state agency that provides affordable fixed-rate mortgage loans for low- and moderate-income households, is advocating for something more like 5 percent down payments.

Other consumer and industry groups also are stumping for a figure much lower than 20 percent. The Center for Responsible Lending, a North Carolina-based nonprofit research and policy group, has said it would take 14 years for the average American family to save enough money for a 20 percent down payment, based on average home price and median income.

While PHFA has been told its mortgage financing would be exempt, the fear is the definition of QRM will become the industry standard, and lenders would look to that as their benchmark for underwriting, said Kate Newton, the agency’s homeownership director.

PHFA offers up to 97 percent financing on conventional loans.

The proposed guidelines also are not expected to apply to government-controlled mortgage entities such as Fannie Mae and Freddie Mac or the Federal Housing Administration, which requires 3.5 percent down payments. Fannie and Freddie and FHA control the majority of all home mortgages.

Newton said she believes the proposed rules would limit demand for non-QRM securitizations, which likely would mean fewer issuers. With fewer options available, it would be more expensive, she said.

David Barr, a spokesman for the Federal Deposit Insurance Corp., one of the six agencies involved in the rule changes, said the nonqualified buyers, or those with less than 20 percent down, likely would see higher interest rates on loans.

There is still going to be a market for nonqualified loans, Barr said, despite concerns from real estate professionals that lenders would be less likely to lend money.

“If the buyer is not a QRM, the lender has to hold it in his portfolio,” Campanella said. “He can’t bundle and sell it as a mortgage-backed security.”

Most lenders bundle loan notes and sell them in the secondary market to public and private investors, who make a profit off the mortgage interest.

The comment period on the proposed changes was extended to Aug. 1 after consumer and industry groups, including the National Association of Realtors, as well as lawmakers, expressed concerns about the deadline. Comments are being accepted by all six federal regulators: the Federal Reserve, the Department of Housing and Urban Development, the FDIC, the Federal Housing Finance Authority, the Office of the Controller of the Currency, and the Securities and Exchange Commission.

Originally, comments were due by June 10.

It’s still too early to know when this proposal, or a revised version of it, could become effective, Barr said. It depends on the number of comments the regulators receive and how long it takes them to come together and work out any changes to the rules, he said.

Once changes are made, the regulators will issue a final rule on the provision, said Barbara Hagenbaugh, a spokeswoman for the Federal Reserve.

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