The Coalition for Sensible Housing Policy
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Executive Summary

Proposed Federal Rule Would Require Homeowners with Less than 25 Percent Equity to Pay More to Refinance - A State-by-State Analysis

In late March 2011, six federal agencies released their proposal to implement credit risk retention provisions included in the Dodd-Frank Wall Street Reform and Consumer Protection Act; the proposal included their definition of the “Qualified Residential Mortgage” (QRM).  The QRM definition requires the issuers of mortgage-backed securities to retain a portion of the risk of potential loss on those assets. Recognizing that risk retention would impose increased costs even on creditworthy borrowers, Congress sought to incentivize more responsible borrowing and lending by exempting some mortgages – QRMs – from risk retention requirements if they met thorough underwriting standards.

However, despite compelling data that demonstrate how sound underwriting and product features, like documentation of income and type of mortgage, have a larger impact on reducing the risk of default than high down payment and equity requirements, the QRM definition issued by regulators is very narrow.  In addition to requiring potential homebuyers to put down 20 percent on the cost of a new home, it also requires current homeowners with a mortgage to have 25 percent equity in their home in order to refinance.  In short, the proposed rule moves many creditworthy, responsible homeowners into the higher cost non-QRM market.

More than Half of U.S. Homeowners with Mortgages Impacted

An analysis of CoreLogic data has found that among U.S. homeowners with mortgages, 52 percent – 24.8 million homeowners – have less than 25 percent equity in their homes.  In the six states with the highest percentage of homeowners who do not have 25 percent equity – Nevada, Arizona, Florida, Georgia, Michigan and Mississippi – more than six out of every ten homeowners with mortgages would not be eligible to refinance with a lower rate QRM. The National Association of Realtors © estimates that borrowers’ costs for non-QRM mortgages may be between 0.80 and 1.85 percentage points higher than QRM loans, while Moody’s economist Mark Zandi indicates the rate hike for a non-QRM would be 0.75 to 1.0 percentage point.

When looking at the sheer number of homeowners who fall below the proposed QRM equity threshold, California is home to the most homeowners with a mortgage – nearly 3.7 million.  Florida has the next highest total, with almost 3 million homeowners with less than 25 percent equity.  They are followed by Texas, Ohio, Illinois and Georgia – all of which have over 1 million homeowners with less than 25 percent equity.

Even the states with lowest percentage of homeowners who fall beneath the threshold have significant populations that will face higher costs.  For example, twenty-six percent of homeowners in New York, the state with the lowest proportion of homeowners with less than 25 percent equity, would face increased costs.  However, that means nearly one-half million New Yorkers will not have the opportunity to qualify for a lower rate QRM based on the equity requirement alone. 

Requirements will Increase Costs for Creditworthy Homeowners

Home equity requirements will increase refinancing costs for millions of responsible, creditworthy homeowners looking to take advantage of low interest rates and refinance their mortgage loans.

On a $210,000 loan, a 0.75 percent increase in the interest rate (the low end of most public estimates) would boost a borrower’s payments by almost $100 per month, and nearly $6000 over five years.  The increase in monthly payments associated with a higher rate non-QRM simply takes funds away from families that could otherwise be used for savings, reduction of other debt, investment, or meeting other family needs – all activities that would improve the borrower’s financial position, reduce their financial risk profile, and contribute to economic growth.  

The analysis of the CoreLogic data clearly demonstrates that the federal regulators’ proposal on QRM will increase refinancing costs on millions of Americans.  The data also show that even with a five percent minimum equity standard, almost 14 million existing homeowners with mortgages will be unable to obtain a QRM.  For those borrowers that have already put significant “skin in the game” through down payments and years of timely mortgage payments, only to see their equity eroded by the housing collapse, the proposed QRM definition tells them they are not “gold standard” borrowers and they will have to pay more.  In effect, the proposed QRM would penalize families who have played by the rules, stayed current on their mortgage, scraped each month to pay their bills and now need to refinance or relocate.

 

State-by-State Analysis of Homeowners Facing Increased Refinancing Costs as a Result of Federal Regulators' QRM Proposal

 

Proportion of Homeowners with Less Than 25% Equity

       Rank       

Total Number of Homeowners with Less Than 25% Equity

       Rank      

National

52%

 

24,764,345

 

Alabama

47%

30

160,265

29

Alaska

44%

35

40,772

42

Arizona

72%

2

950,544

7

Arkansas

51%

18

122,865

34

California

54%

10

3,672,304

1

Colorado

58%

7

658,631

13

Connecticut

37%

42

302,016

23

Delaware

42%

37

76,801

40

District of Columbia

41%

40

40,312

43

Florida

66%

3

2,933,728

2

Georgia

65%

4

1,052,676

6

Hawaii

30%

48

68,641

41

Idaho

54%

10

131,855

33

Illinois

52%

15

1,143,133

5

Indiana

49%

24

297,820

24

Iowa

45%

34

156,948

30

Kansas

48%

26

143,558

31

Kentucky

48%

26

136,392

32

Louisiana

47%

30

99,565

37

Maine

35%

44

23,776

45

Maryland

50%

20

671,179

12

Massachusetts

37%

42

559,371

16

Michigan

64%

5

884,899

8

Minnesota

46%

33

261,346

27

Mississippi

62%

6

23,637

46

Missouri

52%

15

406,267

20

Montana

35%

44

40,069

44

Nebraska

51%

18

113,320

35

Nevada

83%

1

482,068

19

New Hampshire

50%

20

106,059

36

New Jersey

41%

40

765,318

10

New Mexico

42%

37

97,503

38

New York

26%

49

484,856

18

North Carolina

53%

13

806,720

9

North Dakota

34%

46

16,864

47

Ohio

56%

8

1,234,990

4

Oklahoma

50%

20

204,386

28

Oregon

49%

24

341,292

21

Pennsylvania

34%

46

618,355

15

Rhode Island

42%

37

95,190

39

South Carolina

54%

10

324,627

22

South Dakota

N/A

N/A

N/A

N/A

Tennessee

53%

13

518,102

17

Texas

48%

26

1,583,288

3

Utah

55%

9

262,340

26

Vermont

N/A

N/A

N/A

N/A

Virginia

52%

15

652,071

14

Washington

48%

26

679,213

11

West Virginia

43%

36

4,681

49

Wisconsin

47%

30

297,400

25

Wyoming

50%

20

16,332

48

 

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