Consumers may have to pay as much as 20% down for their mortgages to be exempt from risk-retention standards, according to media reports about the discussions among regulatory agencies.
The reports stated that the Federal Reserve, the FDIC and Office of the Comptroller of the Currency have tentatively agreed to define a qualified mortgage as one in which the consumer makes a 20% down payment.
In an effort to encourage financial institutions to be more careful about whom they lend money to, lawmakers included a provision differentiating between higher and lower quality mortgages in last year's financial overhaul bill. If a mortgage were deemed nonqualified, the lender would have to retain 5% ownership if it is sold on the secondary market.
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The rule could make nonqualified mortgages more expensive because financial institutions would have to put more money aside in order to back those loans.
The regulators are expected to issue a proposed rule later this month.
Two senators who worked on the financial overhaul had contrasting reactions to the development.
"There is absolutely no doubt that poor underwriting standards and insufficient down payments were primary causes of the credit crisis, and failing to address these weaknesses would be a real failure to learn our lesson. Borrowers making meaningful down payments are at a considerably reduced risk of defaulting on their loans. I applaud any plan that helps us improve underwriting standards," said Sen. Bob Corker (R-Tenn.), who was a negotiator during parts of the legislative process leading up the bill's passage.
But Sen. Johnny Isakson (R-Ga.), who was one of the authors of the provision on qualified mortgages, wrote in The Hill that the 20% down payment wasn't what the drafters intended and it would unfairly penalize some responsible consumers.
"Simply put, a large down payment is not the most effective gauge of whether or not the borrower will pay their mortgage," he wrote.
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