So, you're thinking about buying a home. You haven't won the lottery, so you're going to use a mortgage. I hope you've been saving your pennies - 5 million of them. If regulators in Washington have their way, that's what it's going to take to buy an average-priced home in Austin.
Last summer, Congress passed a sweeping overhaul of the financial system called the Dodd-Frank bill. That bill created a new class of mortgage loans called "qualified residential mortgages" (QRMs). This class is important because the bill makes it harder for mortgage lenders to securitize any loan that is not a QRM, and securitization is the grease that makes the mortgage market work and keeps interest rates low.
The problem is the bill left it to regulators to define a QRM, and as regulators seem apt to do, they have made a mess of things. The proposed definition for QRM is a 20% down payment with other limiting restrictions. In Austin, to buy a $263,700 average-priced home, that means you would need $52,740 for the down payment.
Senators inserted the QRM language into Dodd-Frank in an effort to encourage less risky lending. But as with a lot of government meddling, the unintended consequences may be horrendous. Many industry pundits expect the QRM to become the new "conforming" mortgage, the loan product offering the lowest interest rates. Non-QRM loans are likely to have interest rates as much as 2% higher.
The real estate industry and consumer groups are united against this proposed definition. The Community Mortgage Banking Project released a report in March that analyzed 33 million home loans written between 2002 and 2008. The results showed higher down payments had a very small impact on mortgage defaults. Doubling the down payment from 5% to 10% only reduced the default rate by 0.2% to 0.3%, and increasing the down payment requirement to 20% would eliminate between 27% and 40% of potential homebuyers from eligibility for a loan.
Consumer groups point out that middle-class and minority borrowers would feel the greatest impact from the proposed definition. A recent study showed it would take the average consumer more than a decade to save the required 20% down payment in most parts of the country. Homebuyers unable to afford the minimum down payment would be considered high risk even if they have an otherwise stellar credit history.
The senators responsible for QRM recently wrote regulators advising them that they intentionally did NOT include a down payment requirement in the definition and they never intended the definition to be so strict. More than 160 House lawmakers also wrote to regulators stating that the "overly burdensome dictate could threaten a full-fledged economic recovery."
Regulators have responded to all this pressure by extending the comment period for the definition to Aug 1st. It is not clear whether regulators are having second thoughts, but at least this gives lawmakers, consumer group, industry representatives, and YOU more time to encourage them to develop a more reasonable definition.
If you have a mortgage question, please leave a comment below, and I'll address it in an upcoming column.
Genie Is Out of The Bottle
Texas Lt. Governor Dan Patrick starts quest to ban all forms of THC
Texas Lt. Gov. Dan Patrick is launching a quixotic quest to ban legal THC: According to a release, Patrick is pushing legislation that would ban all forms of consumable Tetrahydrocannabinol (THC) from being sold in Texas.
He's promoting Senate Bill 3, which would be carried by Sen. Charles Perry, R-Lubbock, and would ban all forms of THC.
Patrick is unhappy with House Bill 1325, introduced by Rep. Tracy King, D-Uvalde, to bolster agriculture in Texas. It was passed by the Texas Legislature in 2019.
Part of that bill allowed for the commercialization of hemp, which included un-removable non-intoxicating trace amounts of Delta 9 THC.
“Dangerously, retailers exploited the agriculture law to sell life-threatening, unregulated forms of THC to the public and made them easily accessible," Patrick says in his release. "These stores not only sold to adults, but they targeted Texas children and exposed them to dangerous levels of THC."
"Since 2023, thousands of stores selling hazardous THC products have popped up in communities across the state, and many sell products, including beverages, that have three to four times the THC content which might be found in marijuana purchased from a drug dealer," he says.
It seems like the genie is out of the bottle: According to the Baker Institute, hemp in Texas is booming: From 2020 to 2023, sales of hemp-derived cannabinoids increased by 1283 percent, reaching a value of $2.78 billion last year.
And efforts to reel it back in are basically doomed, they say.
"While prohibition may seem like the simplest response, it is almost certain to fail — both in eliminating widespread access to hemp-derived cannabinoids and in protecting the public," they say.
"As of April 2024, Texas had over 7,000 registered hemp dispensaries," they note. "More than 50,000 Texans are estimated to be employed through the hemp sector. A state ban would ruin this industry, but it would not reduce consumer demand for hemp-derived cannabinoids. Instead, consumers would turn to the illicit hemp market that would inevitably form in the wake of state prohibition. Products sold today in state-registered shops would still be available through underground supply networks that would reap billions in tax-free profits."
They say that "a broad ban, even a poorly enforced one, would harm consumers more than the state’s current system."
Meanwhile voters are supporting marijuana decriminalization efforts such as the one recently approved by the city of Dallas, as well as Austin, Denton, Elgin, Killeen, and San Marcos.
Catina Voellinger, Executive Director of Ground Game Texas, a Texas group that has been advocating for decriminalization of marijuana, says in a statement that the legislation would turn back the clock to a more repressive time.
“Instead of banning THC, lawmakers should focus on legalizing marijuana statewide, which would allow for cannabis to be safely regulated, and would prevent countless residents from being harmed by unnecessary arrests and prosecutions for possessing something that is already legal in 24 states," Voellinger says. "We’ve seen repeatedly that this is what Texans want – our marijuana decriminalization ballot initiatives in Dallas, Lockhart, and Bastrop won overwhelmingly this November.”
Daryoush Austin Zamhariri, Executive Director of Texas Cannabis Collective, a group working to change cannabis laws, calls Patrick's endorsement of legislation that would ban all consumable THC products in Texas "tremendously out of step with the overwhelming majority of Texans."
"Poll after poll has shown the citizens of Texas support legalizing cannabis and ending the failed policy of cannabis prohibition," Zamhariri says. "These attitudes have manifested in several campaigns to progressively decriminalize marijuana possession in cities across the state with bipartisan super majority votes through local ballot initiatives. We oppose SB 3 and look forward to working with our coalition partners at the 89th Legislature to bring common sense cannabis reform to the entirety of Texas.”