Is the traditional 30-year mortgage at risk of extinction?
A trend update on proposed mortgage lending rules
That might seem like a strange question to ask but future changes to the mortgage lending laws may make that happen. Scotty Ball, a real estate attorney specializing in residential and commercial real estate law with the Gainesville, Ga.-based law firm Stewart Melvin & Frost, offer his perspective on what has taken place on the front lines of the real estate market crisis as well as at the national level in Congress.
Question: In the wake of the housing crisis that we have witnessed over the past few years, will we ever see a return to a normal real estate market?
Scotty: The market will eventually come back, but this crisis has led to reforms in mortgage lending that will definitely change the future of how we buy homes.
Last July, Congress passed the Dodd-Frank financial overhaul law that addressed a lot of issues contributing to this recession. It imposed new restrictions on banks and lending, and one of the key areas still being addressed involves mortgage loans. As part of the Dodd-Frank law, six different federal banking regulators - including the FDIC and the Federal Reserve - have been charged with the task of writing the specifics of the new rules that will govern the future of mortgage lending.
The intent of these new rules is to protect borrowers and taxpayers from the risky lending practices that led to the collapse of the housing market. However, there is concern among bankers and the real estate industry that these rules could go too far by making it more difficult to buy a new home, particularly for low-income and first-time homebuyers.
Some opponents project that the 30-year fixed-rate mortgage loan - the traditional favorite of American borrowers since the 1950s - could eventually become a luxury product. They also fear that the new rules could cause interest rates to rise sharply.
Question: Can you give us an example of some of the proposals that will have the biggest potential impact on homebuyers?
Scotty: The proposed rule getting the most attention is what is called the "risk retention" requirement. Under this proposal, banks will be required to hold 5 percent of the credit risk for mortgages and other loans that are bundled together and sold off as securities. The idea is that banks will do a better job of making safer and higher quality loans if they are required to have more "skin in the game."
Over the past few decades, banks had gotten out of actually owning their mortgage loans. Instead, the loans were sold off to government-sponsored, publicly-traded institutions like Fannie Mae and Freddie Mac that were created by the federal government to increase the availability of loans.
The proposed new rule requiring banks to share in the financial risk of loans is creating some controversy because it would exempt the "risk-retention" requirement for any "gold-standard" mortgages in which the buyer makes a 20 percent down-payment or more.
Question: Who would that have the biggest affect on?
Some say this exemption could cause banks to turn their backs on those who can't afford such a large down-payment - primarily first-time homebuyers and many middle-class households.
According to national real estate data, nearly half of all homeowners with a mortgage had less than 20% equity in their homes. And the National Association of Realtors states that 96 percent of all first-time homebuyers make down-payments less than 20 percent.
A bipartisan group of three U.S. senators - including Georgia's Johnny Isakson - has expressed to federal regulators that the proposed 20 percent down-payment rule "goes beyond the intent and language of the (Dodd-Frank financial overhaul law)."
So, this is a very controversial proposal that those of us in the real estate industry will be following closely. Keep in mind that these new rules are all under discussion, so we'll just have to wait and watch to see how it all plays out over this summer.
Question: Fannie Mae and Freddie Mac, the government-sponsored institutions, practically collapsed during the housing crisis and had to be rescued by taxpayers with a clean-up amounting to over $135 billion. Do the new mortgage proposals address this situation?
Scotty: Yes. This is one area where there is agreement on both sides of the aisles in Washington. The Republicans in Congress and the Obama administration have vowed to get the government out of the mortgage business. They want to let the private market take over Fannie and Freddie's functions of supporting the market for home loans.
But once again, there is not total agreement on this issue. Lenders and consumer advocates say that any privatization could disrupt lending, making matters worse and outweighing the protections that they were designed to provide.
Still, most observers agree that we won't see the federal government withdraw its support of the housing market any time soon. Congress must agree on a plan, which could take several years, and then the mortgage market would have to be weaned slowly from its dependence on the government for financial backing.
As I mentioned earlier, hanging in the balance are the basic features of a mortgage loan - the interest rate and repayment period - that could be radically changed forever if the government pulls back and lets the private market begin dictating price, terms and availability of house loans.
It's an interesting scenario: Taxpayers want to eliminate the risk of future government bailouts. But how can you still provide affordable loans that allow people to reach the American dream of owning their own home?
This is a tricky balance that will be difficult to achieve.
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