Senators Bob Corker (R-TN) and Mark Warner (D-VA) have introduced legislation to reform the nation's housing finance system that rightly recognizes the importance of having a government backstop to private capital. This is essential to providing ample liquidity and support for 30-year, fixed rate mortgages. Any mortgage finance legislation that does not include a full government backstop will fall short of true reform.
The legislation attempts to advance broad access to mortgage credit. However, it includes a five percent down payment requirement, which is a restriction that will do more harm than good. It will limit access to credit for many borrowers and delay home purchases. The result will be a weakened housing market that hampers the economy.
This restriction also understates the savings requirements for borrowers, because it doesn't factor in closing and escrow costs. These fees often reach an additional three percent for borrowers. This access to credit restriction would be particularly harmful to borrowers of color. With households of color accounting for an estimated seven out of ten net new households from 2010-2020, imposing arbitrary down payment standards could exclude a large portion of the market from accessing affordable mortgages.
For example, a UNC-CRL study found that down payment restrictions would have dramatically reduced access to credit for many borrowers of color who were successfully paying on their mortgage during the foreclosure crisis. A five percent down payment requirement would have excluded 33 percent of successful African-American borrowers and 22 percent of successful Latino borrowers in the study sample.
Other aspects of this legislation also merit further attention. First, the bill appears to say that only mortgage borrowers up to a 43 percent debt-to-income (DTI) ratio would be eligible for this government backstop. This approach is overly restrictive and the legislation should, instead, allow appropriate underwriting standards for borrowers whose DTI ratios are above this limit. Second, as reforms are publicly debated, it is important to explicitly ensure that lenders of all sizes – from the very large to small institutions -- be able to fairly compete for borrower business.
Finally, the new structure must ensure that issuers can modify troubled loans. One way to do that is to allow issuers to hold loans in portfolio. This would allow loans to be purchased out of securities and encourage servicers to engage in successful loss mitigation.
As we all look to the future of housing finance, any new system must serve the entire market and provide lower-wealth borrowers with appropriate access to affordable credit.