4 in 10 Could Face Higher Rates
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- Kara Johnson | May 20, 2011
A proposed rule that would require homebuyers to put at least 20 percent down to qualify for the lowest mortgage rates would have excluded nearly two out of every five mortgages originated last year, according to a new analysis.
The data analysis firm CoreLogic reports that 39 percent of all mortgages and refinances issued in 2010 were made with less than 20 percent equity. That would put them below the standard for being considered a “safe” mortgage under a rule put forward by federal regulators, and would therefore be subject to higher interest rates and fees.
Even lowering the standard to 10 percent equity would have meant that a quarter of all 2010 mortgages would not be considered a “qualified residential mortgage” (QRM) under the new rule.
Borrowers who can’t meet the QRM standard could end up paying as much as three additional percentage points in interest, such as 8 percent instead of 5 percent, according to some analysts, because those loans would be more expensive for lenders to make.
The rule, required by last year’s Dodd-Frank financial reform legislation, concerns what type of loans would be exempt from a requirement that lenders maintain at least a 5 percent interest in the mortgages they issue. That provision, known as “skin in the game” is intended to discourage mortgage lenders from making risky loans and selling them off to investors, and prevent abuses of the type that led to the collapse of the subprime mortgage markets in 2008.
The Dodd-Frank Act establishes the 5 percent requirement, but also allows an exemption for mortgages that are considered safe enough that a default is considered highly unlikely. Federal regulators recently proposed that this exemption be limited to mortgages with at least a 20 percent equity, either as a down payment for home purchases or as equity in a refinance.
Many in the mortgage industry have objected that this standard is too high and would make mortgages too expensive for many borrowers. The Mortgage Bankers Association, National Association of Realtors and others have been vocal in calling for a lower down payment requirement, perhaps combined with private mortgage insurance to help minimize the risk of default.
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