Yesterday something calling itself the Coalition for Sensible Housing policy put out a dense 13-page white paper entitled “Proposed Qualified Residential Mortgage Definition Harms Creditworthy Borrowers While Frustrating Housing Recovery”.
It’s all part of the lobbying campaign surrounding Dodd-Frank, and the eminently sensible idea that if a bank wants to securitize a bunch of mortgages, it has to keep at least 5% of those mortgages for itself. Somehow, in the course of putting Dodd-Frank together, an exception was carved out to that rule, called the Qualified Residential Mortgage, or QRM. For the small group of the most copper-bottomed mortgages, banks could sell off the whole lot, without having to retain 5%.
This gave the mortgage lobby an opening, and they’re attacking it aggressively. They want to open the QRM loophole as wide as possible, and are now kicking up a very loud fuss, complaining that consumers will be damaged if they can’t get access to a QRM loan. The main part of the QRM qualification that they’re upset about is the requirement for a significant downpayment, and so a central part of the lobby’s argument is that if you’re underwriting loans properly, increasing the downpayment doesn’t have much of an impact on delinquency rates. There’s other bits to the argument, too, such as the idea that non-QRM mortgages are going to be much more expensive, but for this post I’m just going to concentrate on the downpayment question.
The white paper explains — in bold type, on page 5 — that “boosting down payments in 5 percent increments has only a negligible impact on default rates”. It continues:
As shown in Table 3 (and in Attachment 2), moving from a 5 percent to a 10 percent down payment requirement on loans that already meet the defined QRM standard reduces the overall default experience by an average of only two- or three-tenths of one percent for each cohort year.
Of course, there are charts and tables. The table comes first:
This is so misleading and confusing that I’ve spent a large chunk of the past 24 hours trying to work out what on earth it’s actually saying, and where the data comes from. The raw data here is indeed being sourced from CoreLogic, and a company called Vertical Capital Solutions did analyze that data, in February 2010. The Vertical Capital report did not, however, have any of the information in this table. Indeed (and inconveniently, from the mortgage lobby’s point of view), it had a whole page which talks about how qualified loans have “substantially higher Delinquencies and Defaults on Qualified Loans with a LTV >80″. (Loan-to-value, or LTV, is the converse of the downpayment: the downpayment and the loan combined are 100% of the loan, since qualified mortgages by definition exclude piggyback loans were second mortgages are involved.)
What the Vertical Capital report does have is a chart of delinquency rates on qualified loans where the LTV is less than 80%, on page 7, and another chart where the LTV is more than 80%, on page 8. Put the two together, and you get something like this:
The difference in delinquency rates between the low-downpayment loans and the high-downpayment loans, here, ranges from 2.94 percentage points for the 2008 vintage, to 7.15 percentage points in 2006. Clearly much bigger differences than are implied in the white paper’s table. And if you look at the percentage increase in delinquency, it’s enormous: all of the delinquency rates more than double, with the lowest increase being 101% in 2006 and the highest being an amazing 502% in 2002.
The mortgage lobby’s own chart, of course, looks very different indeed. Here it is, from page 12 of the white paper:
What this chart purports to show is that non-qualified loans — the red bars — have very high delinquency rates, while qualified loans — the purple, green, and blue bars — have much lower and pretty similar delinquency rates, regardless of the downpayments they use.
But look more carefully. The non-qualified delinquency rates include all delinquencies for all non-qualified loans. But the qualified delinquency rates are not directly comparable, because all of them specifically exclude qualified mortgages with a downpayment of less than 5%.
I spent some time today talking to the man who put this chart together. (It’s sourced to Vertical Capital, but in fact these numbers came from Genworth’s own analysis of CoreLogic’s data, and Vertical Capital did none of this work.) His name is Anthony Guarino, and he’s the vice president of public policy at Genworth mortgage insurance — the company which initially commissioned the Vertical Capital report. I asked him, if he was showing the delinquency rates for all non-qualified loans, why wouldn’t he show the delinquency rates for all qualified loans? Well, he said, “the consortium didn’t want to even talk about zero downpayment mortgages. Why would we even show that? We’d lose credibility if we showed a qualified loan with no downpayment.”
Guarino was perfectly happy to tell me that by excluding all the loans with downpayments of less than 5%, “you’re throwing out the loans with the higher default rates. No one’s saying that downpayment doesn’t matter.” But compare that with the official tone of the white paper:
Based on data from CoreLogic Inc., nearly 25 million current homeowners would be denied access to a lower rate QRM to refinance their home because they do not currently have 25 percent equity in their homes… Even with a 5 percent minimum equity standard, almost 14 million existing homeowners – many undoubtedly with solid credit records – will be unable to obtain a QRM. In short, the proposed rule moves creditworthy, responsible homeowners into the higher cost non-QRM market.
This sounds very much as though even a 5% minimum downpayment is desperately unfair to millions of American homeowners; there’s no indication whatsoever, in the paper, that including a minimum downpayment of 5% in the definition of what constitutes a qualified mortgage might actually be a good idea. Yet when the consortium wants to publish a chart showing the delinquency rates of qualified mortgages, it’s very careful to first strip out any mortgages with a downpayment of less than 5%.
On top of that, the bars in the official chart all look very similar largely because they are very similar: the industry is essentially comparing a set of loans with itself, and declaring that there’s not a lot of difference. The purple bar is all the loans with a downpayment of more than 5%; the green bar is all the loans with a downpayment of more than 10%; and the blue bar is all the loans with a downpayment of more than 20%. The blue bar is a subset of the green bar, which in turn is a subset of the purple bar. The chart is designed, in other words, to look at similarities rather then differences.
I asked Guarino if he could send me the data sliced more naturally: how do loans with a downpayment of less than 5%, for instance, compare to loans with a downpayment of between 5% and 10%? To his credit, he did come back to me with some new data, even if it wasn’t exactly what I asked for: he refused to slice the loan tranches by year, as he did in this graph. Instead, he would only give me aggregate figures, for 2002-2008 and for 2002-2004. Here’s what they look like, charted:
When the mortgage industry starts complaining about the 14 million people who would be denied the chance to buy a qualified mortgage if they don’t have a 5% downpayment, it’s worth remembering that qualified mortgages for people who don’t have a 5% downpayment have a delinquency rate of 16% over the course of the whole housing cycle. (You can be sure the numbers were much higher still in 2006 and 2007, which is why Guarino didn’t give them to me.)
And you can see too why the 20% downpayment limit was put in place: it’s the point at which delinquencies fall to less than 5%. If you take one group of loans with a 20-25% downpayment, and a second group of loans with a 15-20% downpayment, then the second group, on these numbers will have a delinquency rate 56% higher than the first.
The big picture here is that QRM is a distraction, which really shouldn’t exist in the first place. But given that it does exist, the downpayment requirements embedded within it are perfectly sensible. The lower the downpayment, the more likely a loan is to become delinquent. By far. That’s a simple fact which the mortgage lobby will go to astonishing lengths to hide.
Update: Guarino responds in the comments.