Proposed New Morgage Lending Rules Require 5 Percent Downpayment

In an unconventional move, legislation designed to reshape the nation’s $10 trillion housing finance market was released on Sunday, March 16. Since then, reactions to proposed broad changes have ranged from strong support to ‘wait-and-see,' and outright opposition.

According to the bill’s authors, Senators Tim Johnson, Chair of Senate Banking Committee and Mike Crapo, the committee’s Ranking Member, the rare weekend release was the result of months of effort to accommodate varied input to secure bipartisan support and move the proposal forward in time for a full Senate vote by November.  

In a news release, Johnson said, “This proposal includes an explicit guarantee in order to add stability to the economy, keep costs reasonable for borrowers and renters, and ensure fair access to the secondary market for all lenders.”

Crapo said, “There is broad support to fix our flawed housing system, and today’s actions are a strong step toward ending the status quo.”  

But just how much support there is for the 442-page legislation really depends on who is speaking.

“Housing finance reform was too important to rush a committee deal on, and in my view, it’s also too important to rush a markup on,” said Senator Elizabeth Warren, also a member of the Senate Banking Committee. “We should have a full, open discussion before we decide to set out on a new path, and that means members of the Banking Committee should have real time to dig in and consult with people before a markup.”

While the Senate Banking Committee deliberates on the proposed legislation, organizations that researched the housing crisis and others representing consumers affected by it are speaking up.

In a recent radio interview, Mike Calhoun, president of the Center for Responsible Lending (CRL) said, “It’s a radical surgery proposal; it’s somewhere between a complete tear-down and an extreme gut rehab. The question is does that get us to a better place? And middle and moderate income families might be less served with this approach. The new model could make it harder and more expensive for a lot of people to get mortgages.”  

CRL research shows that the average family would need 14 years to save enough money for a 5 percent down payment. For Black families, the number of required years would double to 28 for the same 5 percent and 17 years of saving for the average Latino family.

Further, home down payment savings do not take into account closing costs, which typically are an added 3 percent of the cost of the mortgage or mortgage insurance that is required for homes purchased with less than a 20 percent down payment. In CRL’s view, there is no wisdom in requiring these homeownership delays when so many families have successfully paid mortgages made with low down payments such as FHA loans.

Despite these findings, the Johnson-Crapo legislation would still require mandatory down payments: 3.5 percent for first-time borrowers and 5.0 percent for all others. The legislation would also eliminate affordable housing goals for Fannie Mae and Freddie Mac, two government-sponsored enterprises (GSEs). The bill would phase out both GSEs and replace them with a new agency. Instead of affordable housing goals, market-based incentives would be developed to promote business in underserved areas for both homeownership and rental properties.

Speaking on behalf of the National Council of LaRaza, Eric Rodriguez said, “Latinos have still not recovered from the housing crisis, which sent millions of homes into foreclosure and decimated our community’s wealth. In order to rebuild assets for Hispanic families, this legislation must, above all, ensure access to affordable credit for low-and-middle income families, which will help build stronger neighborhoods and support our national economy.”

Rodriguez’s concerns are also true for millions of Black families who, like many Hispanic ones, were targeted and sold high-cost, predatory mortgages that resulted in foreclosures and lost wealth. Earlier CRL research found that these two communities of color bore the brunt of lost family wealth during the housing crisis.

A new policy brief from the Urban Institute concludes that these racial disparities in mortgage lending are still continuing.

The Urban Institute wrote, “While all borrowers lost household equity in the Great Recession and are now feeling the crunch of tightening credit, minority borrowers may feel it most. Many of these minority borrowers received the kind of predatory mortgages now forbidden under the Dodd-Frank Act. .  . .Now, strict credit standards and lowered FICO scores due to missed payments or foreclosure prevent many of these same borrows from entering the housing market despite lower prices.”   

Additionally, the Institute found:

After 2005, mortgages purchased by African-Americans and Hispanic borrowers dropped respectively by 76 and 78 percent;

From 2005 to 2012, the drop in loans for African-Americans went from more than a half-million loans to 131,470;

The decline for Hispanic consumers during these same years dropped from 986,206 to less than 250,000; and

Loans to non-Hispanic White and Asian borrowers declined by only 56 and 59 percent.

In short, while the overall housing market continues to improve, the consumers hit hardest by the financial decline are still being left out of the recovery.

As CRL’s Calhoun has said, “With a fragile housing market, it does raise questions about whether this is the time to shake the whole thing up.”

Charlene Crowell is a communications manager with the Center for Responsible Lending. She can be reached at Charlene.crowell@responsiblelending.org.