Why Homebuyers Shouldn't Be Required to Put Down 20 Percent

If you think the recession and continued sluggish economy have made it difficult to finance the purchase of a home, Congress is considering a regulation that could make things a lot worse.

The National Association of Realtors® (NAR) recently sent out a Call for Action about a proposal that will in effect require buyers to put 20 percent down on conventional residential mortgages in order to get the prime rate.

The proposal is tied to The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. A section of the Dodd-Frank Act requires financial institutions that securitize mortgage loans to retain at least 5 percent of the credit risk.

The intent is to force lenders to have more “skin in the game” and encourage responsible lending. Remember that securitization of high-risk mortgages is one practice that contributed heavily to the recession and housing market crash.

But something called a “Qualified Residential Mortgage” (QRM), and federally-backed loans such as FHA and VA are exempt from the 5 percent rule.

If this new proposal passes, only conventional loans with 20 percent down or more will be considered QRM. Those loans will get the best mortgage rates, because banks have a market incentive to securitize them. They don’t have to have additional skin in the game.

Sure, lenders can underwrite mortgages for folks with less down. But you better bet they’re going to pass-on that increased risk to consumers in the form of higher interest rates, etc.

Complex stuff, I know. But bear with me.

Like the NAR, I support the general goal of responsible lending. But I do not support the extent of this new proposal. If allowed to take effect, the rule would put home ownership out of reach for creditworthy middle-income Americans.

It would take 14 years for the typical person to save enough money for the down payment on a median-priced home. NAR research also shows that 60 percent of recent home buyers made less than a 20 percent down payment.

I’m glad the proposal won’t impact federally backed loan programs such as FHA and VA . But those programs are capped at a little more than $700,000 for single family residences. In Encino a large number of homes are priced well above that limit –even after taking a beating over the past few years.

Sellers of higher-end houses, those wishing to buy said homes, and buyers who don’t want to go the FHA or VA route will have very limited financing options.

This is not a step in the right direction for turning around our struggling housing market and economy. I agree with the NAR’s statement that responsible lending standards and ensuring a borrower’s ability to repay have the greatest impact on reducing lender risk.

For more information and to see a sample letter to Congress visit NAR at realtor.org