The qualified mortgage (QM) proposal has spawned all sorts of rumors. One of the most persistent rumors has to do with a 20% down-payment requirement for all home loans, or at least those meeting the definition of QM. It is unlikely that the Consumer Financial Protection Bureau, or any other government agency, would mandate such a requirement.
We will delve into the history of this rumor in a moment. But first, a bit of background:
What is a Qualified Mortgage?
The term ‘qualified mortgage’ was first used within the Dodd-Frank Act, which was signed into law in 2010. The QM provisions of this act are meant to reduce the level of risk associated with mortgage lending.
Specifically, it aims to limit or completely prohibit the types of exotic, high-risk loans that contributed to the housing crisis. It will do this by forcing lenders to verify a borrower’s ability to repay the mortgage obligation, and also by preventing certain types and features of loans. For instance, these regulations would prevent the use of interest-only payments that allow the principal balance to grow over time.
The QM rules only exist in proposal form at the moment. The Consumer Financial Protection Bureau (CFPB) has not yet finalized them. They are expected to finalize the requirements sometime in January 2013.
Proposal of a 20% Down Payment
There actually was a proposal for a 20% down-payment requirement on qualified mortgage loans. It came from a handful of federal agencies, including the FDIC and HUD. It is the source of all the rumors swirling about today. But there’s a long way between proposal and passage, when it comes to federal laws with such a broad effect.
The idea behind the proposal is that it would reduce the number of foreclosures in the United States. It’s true that there is a correlation between the size of a borrower’s down payment and the likelihood of default. But a 20% requirement would likely shut out a large number of otherwise qualified borrowers, including those with excellent credit and very little debt.
Push Back from Builders, Bankers and Consumer Groups
As soon as it was voiced, the down-payment proposal generated backlash from a variety of groups. It seemed that everyone from mortgage bankers to civil rights groups were against it. Organizations that didn’t always see eye to eye were suddenly united by their common opposition to the proposal. A large, bipartisan group of senators and representatives sent letter to the agencies, asking that they put aside the down-payment rule since it would harm a housing market that was already struggling.
Fast forward to today. Federal regulators put the issue up for public comment. They have since reviewed those comments, and they are now set to finalize the qualified mortgage guidelines over the next two months. They have been tight-lipped about the 20% down-payment issue and most other aspects of the QM rules. But given the overwhelming opposition we saw over the last year or so, it is highly unlikely the 20% rule would be imposed.
The finalized version of these rules should be released some time in January 2013. The Dodd-Frank Act gives the CFPB a deadline of January 21, 2013. But they may beat that deadline and publish the rules early. Whatever the case, we will update this website with new information as it becomes available.