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.
Texas tragedy
Camp Mystic withdraws controversial summer reopening application
AUSTIN, Texas (AP) — Camp Mystic on Thursday, April 30 halted reopening plans on the Texas river where floodwaters killed 25 girls and two teenage counselors, backing down in the face of outraged families and investigations that accused the all-girls Christian camp of dangerous safety and operational deficiencies.
The decision, a striking reversal of the camp owners' determination to reopen, follows weeks of testimony in court hearings and legislative investigations. Those hearings laid bare the camp’s lack of detailed planning for a flood emergency, reliance on poorly trained staff, and missed chances for an evacuation that came too late as floodwaters ripped through the camp over the July 4 weekend last year.
“We never imagined a world without our daughters, and no decision made now can change that," Matthew Childress, father of 18-year-old counselor Chloe Childress who died, said in a statement.
The camp’s owner, Dick Eastland, also died in the flooding.
“No administrative process or summer season should move forward while families continue to grieve, while investigations continue and while so many Texans still carry the pain of last July’s tragedy,” Camp Mystic said in a statement.
A spokesperson for the Texas Department of State Health Services confirmed Thursday that the camp has withdrawn its application.
The decision was praised by Texas Lt. Gov. Dan Patrick, who opposed the camp's reopening while investigations were ongoing.
“I am thankful to hear that, today, the Eastland family withdrew their application,” Patrick said in a statement. “Given the tragic circumstances, this is the correct decision to protect Texas campers and to allow time for all investigations to be completed.”
The families of the victims packed the court and legislative hearings, often wearing “Heaven’s 27” pins with photographs of their daughters. They listened to the details of missed flood warning signs, the descriptions of the flood and the decision to leave the girls in their cabins until it was too late. The testimony included video of the raging floodwaters as a girl repeatedly screamed for “help!” somewhere in the distance.
Edward Eastland, one of the camp directors and a member of the Eastland family that owns and operates the 100-year-old camp on the banks of the Guadalupe River, offered a tearful public apology to the victims’ families on Tuesday.
“We tried our hardest that night. It wasn’t enough to save your daughters,” Eastland said, with the victims' families sitting behind him. “I’m so sorry.”
All told, the destructive flooding killed at least 136 people along a several-mile stretch of the river, raising questions about how things went so terribly wrong.
Texas health regulators have said they are investigating hundreds of complaints against the camp's owners. The Texas Rangers are also looking into allegations of neglect, according to the Texas Department of Safety, although the scope of the state’s elite investigations unit was not immediately clear.
The camp, established in 1926, did not evacuate as the storm rolled in and was hit hard when the river rose from 14 feet (4.2 meters) to 29.5 feet (9 meters) within 60 minutes.
