Jackson Jambalaya

Two "housing advocates" penned this letter in the Clarion-Ledger last week:

"Asking creditworthy, middle-income families to come up with a 20 percent down payment on a mortgage is asking for a lot, given the current economic climate.

Asking credit worthy, low-income families is asking for the impossible, but that is exactly what a new, proposed federal rule does.

Without a 20 percent down payment, borrowers will have to pay more in interest rates and closing costs for their mortgages, creating a two-tiered lending system: one for the wealthy and one for the rest of us.

The rule is known in the industry as the Qualified Residential Mortgage (QRM) provision, and it poses a new set of threats to home ownership for countless families and especially minorities and first-time homebuyers.

According to housing experts, it takes an average African-American household 15 years to accumulate a 10 percent down payment and 5 percent closing costs, and average Latino households would need 12 years to do so. How long might it take for an African-American family to save up a 20 percent down payment? Far too long.

Buttressing this data are Census Bureau statistics indicating that African-Americans had a median net worth of about $8,600 in the mid-2000s, which is not enough to generate a 20 percent down payment plus the 5 percent needed for closing costs (a total of $25,000) that the QRM will require to secure a mortgage for even a modestly priced home of $100,000.

When faced with these daunting statistics, it is almost unfathomable to consider the additional ramifications of the QRM's restrictive lending guidelines, which include requiring prospective borrowers to spend less than 28 percent of their monthly gross income on housing, and have total monthly household debt capped at less than 36 percent of their income.

When these stringent criteria are coupled with the additional stipulation that borrowers must present virtually impeccable personal credit histories, the profile of the new American homeowner comes into clear focus: wealthy and, most likely, white...." Letter

Yes, you read this right. These numbskulls advocate borrowers, especially minority ones at that, taking on more debt. There is a reason monthly household debt is capped at 36%- so the borrower can actually....... make the payments. What a concept. Keep in mind the 36% based on gross monthly income. Take out 40-50 percent for all taxes. Then there is gas, groceries, clothing, etc. The cap is used to ensure the borrower can afford the payments and he doesn't get in over his head financially. Can't tell that to these guys as they just want to load down the blacks they love so much with more debt than they can afford. Guess that is their version of tough love except for those who follow their advice, they wind up financially ruined. No problem, they will just blame that on racism and da man.

Then there is the part about how criminal it is to require a twenty percent down payment. These guys can blame their fellow Democrats for this problem. The QRM ruled was stuffed into the Dodd-Frank bill? Remember when some of us raised hell over passing a 2,500 page bill no one had read? Here is one of its goodies. Totalmortgage.com explained in March:

"Under the Dodd-Frank regulatory reform, loan originators will be required to retain capital reserves equal to five percent of all but the safest mortgage loans. The safe loans that will be exempt from this risk retention are called “qualified residential mortgages” (QRMs). The definition for a QRM is expected to be released in the next couple of weeks, but the expectation is that in order to be a QRM, a mortgage loan will need a 20% down payment. This means that those that do not have a down payment of this size will be subject to increased mortgage rates to make up for the risk retention on the part of the lender. The Treasury, the Federal Reserve, the FDIC, the FHA, and other regulatory and governmental agencies are responsible for defining a QRM. Additional explanation at the Wall Street Journal

The rule is intended to ensure that lenders have “skin in the game”. In the past, some mortgage originators would make risky loans, and in turn bundle them into mortgage backed securities and sell them to investors, effectively passing all the risk to another party. These practices were partially to blame for the meltdown of the housing market. Theoretically, the QRM rule would end these risky lending practices."

However, there is one little fact these two "housing advocates" left out: the rules do not apply to mortgages guaranteed by the government. That means FHA mortgages, which have been available to minorities and lower income borrowers for decades, will not be subject to QRM and the tougher requirements. FHA currently allows a minimum down payment of 3.5%. Oddly enough, QRM will not apply to Fannie Mae and Freddie Mac as long as they are in government receivership. That means QRM will not apply to over 90% of the mortgages underwritten today. It should also be pointed out the mortgage insurers are fighting this rule as it assumes a mortgage carries no mortgage insurance.

However, the letter gives one a glimpse into how these people think: they still don't get it. There is a reason 20% is considered to be a magic number in mortgage lending. Defaults skyrocket when lower down payments are accepted. Self employed borrowers and those making a five percent or less down payment always rank at the top of the foreclosure charts. They expect a bank to offer a loan with a much higher risk of default the same rate as a loan that is considered to be "safe". Trustmark offered Fannie Mae subprime loans (E.A. I & II for you mortgage nuts) but the reason it did not get into trouble offering them was because they had interest rates one to two points higher than the competition. In other words, they actually priced them for the risk and guess what? Trustmark did not suffer as did the other banks.

It does these minorities no good whatsoever to get a home they can not afford, take on more debt than they can handle, and see their lives ruined because "housing advocates" such as these ignore reality wedded as they are to their philosophy. All they care about is bragging how much they do for the poor, not what they actually do for the poor and in this case, they will definitely hurt the poor. They are a threat to the people they pretend to support. They complain about Wall Street bailouts but want to follow policies that will ensure more bailouts become the rule and not the exception. But they don't care about that. Better to rabble rouse and keep their supporters stirred up then face economic reality.

There should be a debate over the rule. and no mortgage should be underwritten unless it has a down payment of five percent. However, that same mortgage is riskier and should have an interest rate that reflects the risk. These "housing advocates" ignore the fact the new rules will not apply to FHA and for a time Fannie and Freddie as they are determined to sink lenders everywhere. They want to put minorities into homes they can not afford and bankrupt them with more debt. If I were a minority, I'd punch them in the mouth for their "help".


Note: Already wrote the post but here is this gem of a last paragraph in the letter:

At a time when employment opportunities are vanishing and existing homeowners are losing equity in what is likely their largest investment (and asset), Americans who are creditworthy and otherwise suited to take on the obligations of home ownership should be encouraged to pursue this part of the American dream if they so desire. And the rising foreclosure rates in the Mississippi Gulf Coast area, which are at 3.23 percent, according to CoreLogic, only compound the situation, undermining any kind of real recovery to the market. Low down payments didn't cause the collapse of the housing and financial markets. Poor and risky underwriting standards and subprime loan schemes are the true culprits.

Um, the rule does not deny a mortgage to someone who is creditworthy, only if he has a 60 day late on his credit history. Low down payments didn't cause the collapse but risky underwriting standards did? Accepting low down payments given the fact such mortgages have high defaults rates is risky underwriting. Idiots.