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On Attack Against Threats to Homeownership

Robert Freedman, REALTOR® Magazine

A wide range of issues that risk putting homeownership out of reach for all but a narrow slice of households in the U.S. are coming to a head.

That’s the big picture that members of Congress must see as REALTORS® flood Capitol Hill for meetings with their senators and representatives this week, NAR’s chief lobbyist Jerry Giovaniello told REALTORS® attending the 2011 REALTORS® Midyear Legislative Meetings & Trade Expo in Washington.

Among the high-profile issues that lawmakers are starting to talk about: Reforming secondary mortgage market companies Fannie Mae and Freddie Mac and deciding whether the mortgage interest deduction should be curbed, perhaps starting with second homes. But these are just the tip of the iceberg, Giovaniello told hundreds of REALTORS® at the Federal Issues Update Wednesday morning.

Some 8,000 REALTORS® are in Washington, D.C., this week and meetings with their members of Congress are a central part of why they’re here.

Among the threats to home ownership for the broad middle class are rising fees and tightening standards for FHA and conventional financing, a looming decrease in high-cost loan limits for FHA and conventional mortgages, a proposal to require a high minimum down payment for “safe” conventional loans, overly rigid FHA condominium financing rules, and a looming expiration of federal flood insurance.

The Question Lawmakers Need to Hear
“This is a perfect storm,” Giovaniello said. “There are 83 new members of Congress.” For these and other members who might not see how all of the different issues knit together, “you need to get back to the original attack on home ownership. The question is whether only a certain class of households will be able to become home owners in this country.”

The proposal for a high down payment is of particular importance, because if the proposal stands, it would lead to further consolidation in the mortgage lending industry, leading to just a few financial institutions in the industry, Giovaniello said. These big lenders are already too big to fail, in the same way that Fannie Mae and Freddie Mac were considered too big to fail. That led to hundreds of billions in bailout funds after the mortgage meltdown.

The high down payment proposal is in a recommended rule by banking regulators that would define a safe conventional mortgage as that with at least 20 percent down, and other tight underwriting requirements. If loans don’t meet that definition, lenders would have to retain 5 percent of the value of the loans on their books, a requirement that would lead to far higher interest rates, knocking out much of the broad middle class of home buyers.

Down Payment Isn’t the Issue; Underwriting Is
Should the proposal be finalized into law, it would lead to concentration in lending among the largest banks because community banks and other small lenders won’t have the resources to hold the 5 percent on their books.

Giovaniello said lawmakers might try to compromise and press the regulators to lower the requirement to 10 percent down, but that misses the point. The issue isn’t minimum down payment, Giovaniello said. FHA and VA have very low down payments, yet they have better loan performance than the conventional market. The issue is simply sound underwriting.

“We have to change this argument,” he said. “Lenders want REALTORS® to compromise at 10 percent. That’s just not going to work.”