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U.S. Mortgage Proposal May Result in ‘Rental Entrapment’

Minority and working class home buying
Prospective home buyer Robert Street, right, follows realtor Phyllis Jackson to look at a home for sale in Chandler, Arizona, U.S., on Sunday, Feb. 14, 2010. Photographer: Joshua Lott/Bloomberg

Minorities and the working class may find it harder to buy homes under a U.S. plan that would require larger down payments to qualify for lower-cost mortgages, according to lenders, consumer groups and lawmakers.

Bankers and consumer advocates, often at odds on policy issues, united today to make the case for revising the government proposal and released data that they said shows the rule would deny loans to millions of borrowers while doing little to reduce defaults.

“This is a civil rights issue,” John Taylor, chief executive officer of the National Community Reinvestment Coalition in Washington, said in an interview. “It falls around people of color. It’s a class issue.”

The rule could lead to “long-term rental entrapment” for “large numbers” of Americans who would need at least a decade to save for a 20 percent down payment, said David Stevens, president of the Mortgage Bankers Association. It would take at least a decade for a family to save that much in Los Angeles, Philadelphia, Seattle, and Birmingham, Alabama, he said, citing U.S. and industry data on household incomes and home prices.

Deadline Extension

Regulators plan to extend the deadline for public comment on the proposal from June 10 to Aug. 1, according to a person familiar with the matter, who declined to be identified because the decision hasn’t been made public. That may delay the law from taking effect.

Spokesmen for the Federal Deposit Insurance Corp., Department of Housing and Urban Development, Office of the Comptroller of the Currency and Securities and Exchange Commission declined to comment. Spokesmen for the Federal Reserve and the Federal Housing Finance Agency didn’t respond to requests for comment.

Taylor and Stevens, former commissioner of the Federal Housing Administration, were among mortgage-finance professionals who held a press conference in Washington where they accused regulators of overreaching and asked that the proposal be rewritten. More than 200 Republicans and Democrats in Congress have expressed similar concerns in letters to regulators.

Reduced housing demand ”due to an overly burdensome dictate, could threaten a full-fledged economic recovery,” more than 160 House lawmakers wrote in a May 31 letter to regulators.

Risky Lending

The Dodd-Frank regulatory overhaul enacted last year required lenders and bond issuers to keep a 5 percent stake in the loans they bundle for sale to investors. Forcing the industry to share potential losses was meant to encourage less risky lending and avoid mistakes that led to a flood of subprime mortgages, which helped trigger the 2008 financial collapse.

The law requires regulators to exempt home loans that are deemed safe, including those with fixed interest rates and long repayment terms. Those exempt loans, known as qualified residential mortgages, or QRMs, in theory would have lower interest rates because they would be considered less risky.

Regulators responded to the law with a proposal to exempt mortgages only if borrowers make a 20 percent down payment and spend less than 36 percent of their income on debt payments.

Neither rule would lead to fewer defaults, Stevens said. A quarter of 2009 mortgage borrowers would have been disqualified under the new rule, said Stevens, citing FHFA. At the height of the housing bubble in 2006 and 2007, the rule would have cut delinquencies by less than 3 percent while reducing mortgages by more than 15 percent, according to the data.

No Down Payments

Today, some lenders are offering loans with little or no down-payment requirements. Last year, the Navy Federal Credit Union began offering loans requiring no down payments to borrowers with good credit and income.

Those opposing the rule are doing so for different reasons.

Industry executives, including mortgage bankers, real estate agents and builders, have said they’re concerned that a decline in lending may hurt housing and the economic recovery.

That would disproportionately affect middle-class and minority borrowers, consumer advocates say. Groups that advocate for limited government, including the Washington-based Heritage Foundation, say the plan may drive home lending to federally insured programs such as the FHA, Fannie Mae and Freddie Mac, which Dodd-Frank exempted from the risk-retention rule.

The Heritage Foundation, in a May 31 letter to regulators, called the 20 percent down payment requirement “utterly at odds with the realities of today’s housing market,” where only 16 percent of first-time buyers in 2010 would have met the standards for a lower-cost qualified mortgage.

The National Urban League said the plan would create a category of “‘high-risk’ borrowers formerly known as the responsible middle class.”

“Adding high minimum down-payment requirements will only exclude hundreds of thousands of consumers -- including legions of minority renters -- from homeownership, despite their creditworthiness and proven ability to afford the monthly payment,” the group wrote in a June 1 letter to regulators.

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