As if things were not already bad for the US homebuilders, a new deal on mortgage risk rules may deal another blow to the market. CNBC is reporting that, according to its sources, federal regulators have come to an agreement as to what defines a Qualified Residential Mortgage, or QRM. The agreement was reached between the FDIC and Office of the Comptroller of the Currency, and would attach a 20% down payment minimum for any loan to be considered a QRM.
The 20% rule would still need to be agreed to by several other departments, notably the Federal Reserve, SEC, FHFA, and Department of Housing and Urban Development. This is important because a QRM is exempt from new rules in the Dodd-Frank Act that would force banks to keep at least 5% of the loan's risk on the balance sheet before securitizing and selling the rest of the loan. Non-QRM loans would therefore be more costly to banks, and banks could pass this cost along to consumers via higher rates. While this deal is clearly aimed at limiting financial firms from making poor loan decisions, its biggest impact will be felt by homebuilders.
The housing market has been in shambles for years, and prospects are murky at best. The market is facing a terrible oversupply as new homes being built compete with the millions of houses built in the last decade's boom. Throw in foreclosure and short sales from people who purchased houses they could not afford, and the supply of houses seems almost insatiable. A weak jobs market recover is affecting housing demand, as people who are unsure of their job prospects hold off on home purchases.
Housing numbers put out by the National Association of Realtors on Monday shows pending home sales declined 2.8% in January, and the December sales number was revised lower. Those figures, along with last week's data (.pdf) from the Commerce Department showing a 12% decline in new home sales in January month over month, paint a picture of a market still struggling to find equilibrium. Tax credits, both at the federal and state levels, and distressed property sales have been distorting data points for the better part of 2 years, and while the market may have stabilized, it does not seem poised to turn up any time soon. Add to that a more restrictive and expensive mortgage environment due to regulatory changes, and hopes for a quick turnaround in housing seem unrealistic.
A look at the comments from recent quarterly reports gives a good view into how the industry is faring. "After four years of steep declines, the U.S. housing market continues to show signs of stabilizing, albeit at historically low levels," were the comments made by PulteGroup's (PHM) CEO Richard J Dugas Jr. Mr. Yearley, of Toll Brothers (TOL), observed,
The market is still tough; the home buyer is still wary. Although our customers recognize that this is perhaps the best time to buy in many years, so far the market is not generating the positive momentum that creates urgency among buyers.
However, we still face challenges, such as rising foreclosures, significant existing home inventory, high unemployment, tight mortgage lending standards and weak consumer confidence.
Clearly these are not the comments of CEOs who are confident; they are comments from men who are uncertain when the market will turn. Further hamstringing buyers with a more restrictive mortgage market by increasing down payment percentage will further crimp both mortgage availability and affordability, keeping sales low. This is a new headwind these CEOs have not yet seen, and will add further downward pressure to their businesses.
I do not disagree that mortgage standards should be tighter. It is my belief that if you cannot save 20% of a home's value to put down to purchase the home, you are more likely to have trouble making the mortgage payments. Saving up the down payment shows fiscal responsibility and is a sign to the bank that a borrower is worthy of being lent hundreds of thousands of dollars. While changing the down payment rule for QRMs may prevent the froth in the housing market seen in the mid 2000s, it will certainly raise costs for people attempting to secure mortgage financing. That, in turn, will be yet another drag on the already beaten down homebuilders.