Should Congress pass legislation to mandate a 20% down payment to qualify for a residential mortgage?
- No (71%, 136 Votes)
- Yes (29%, 56 Votes)
Total Voters: 192
Whatever happened to that bout over the 20% down payment proposal for a qualified residential mortgage (QRM) standard for homebuyers? It has been quiet on the front of that war which broke out in Congress and the real estate community six months ago in March 2011, but the proposal has not departed the scene entirely (and neither has the quibbling over it).
The 20% down payment proposal is currently under review for the approximately 12,000 comments which were submitted in response to the legislation. While proposal advocates prudently argue demanding a 20% down payment standard from homebuyers will reduce the risk of default and foreclosure, opponents cautiously maintain the plan will barricade Americans from purchasing homes and thus stress an already distressed housing market. Down payment standards did not cause the real estate crisis, the opponents say, but rather the shortsighted underwriting standards of lenders are to blame.
Considering the pace of review and the impasse to agreement over the plan, a 20% down payment standard will not likely take effect until 2013 (that is assuming it does not lose its way by then). In the meantime, homebuyers are learning to save for that expected down payment requirement of 20%.
first tuesday take: The squabble over mandating a down payment standard on homebuyers illustrates a paradigm shift in public attitudes towards savings and debt which took place after 1990. To put it simply, Americans used to save more, and now they save less – a lot less, but more than in the mid-2000s.
While personal savings rates were around 8-10% in the 40 years before 1990, it dropped to nearly 0% during the Millennium Boom. Only with the beaten consumer confidence of the recession has the savings rate crawled to 4%.
Why the change? Well, in the days of quick credit and easy money, saving money was not perceived as a necessary priority to homeownership, especially when lenders were putting home mortgage loans out on the market and requiring a 0% down payment or even cash back. It took a Lesser Depression to push Americans to saving again. However as indicated by the regulatory stall, defiance towards dictating a down payment standard to control the gamble of excessive leveraging remains repulsive and near un-American to some. [For more information on the historical trend in savings rates, see the June 2011 first tuesday article, The 20% solution: personal savings rates and homeownership.]
The opponents of the QRM plan are correct in saying irresponsible lender underwriting played a primary role in the housing crisis (a noteworthy observation which brought forth the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010). But down payment standards are inherent to underwriting, and thus cannot be ignored if we are to reform the mortgage lending practice. 20% down will not instantaneously defibrillate home sales volume, but it will start feeding long-lasting and healthy nutrients into an economic recovery. [For more information on the one-year review of Dodd-Frank, see the June 2011 first tuesday article, A Dodd-Frank report card.]
Brokers and agents can affect change in this paradigm shift by counseling homebuyers and touting a return to the prudent fundamentals of savings and debt ratios. You don’t need to be an economist to understand the value of putting cash on the barrelhead, but being a musician might help.
RE: “Federal agencies’ 20% down payment plan faces political hurdles” from the LA Times
Solid underwriting should be adhered to. Why would a bank do otherwise?
Well, banks are mostly at fault for not doing this because when they don’t have to portfolio their mortgages to make a dollar, they let things slide. Perhaps making banks be more responsible for what happens is the way to go. If a bank was allowed to only sell 50% of its mortgages I would say they wouldn’t have any problems adhering to solid underwriting.
Buyers should be allowed to put less than 20% down, just like always; but, if they don’t they will have to pay for mortgage insurance to cover the additional risk. Nothing new here.
But, to avoid the problems that come with falling real estate prices, the practice of nothing down and no income nor asset verification underwriting should be eliminated. If you are conservative you may even vote for no more ARM’s.
Having read the other guys comments above a bit more thoroughly, I would now agree that weak lending standards were the biggest factor. While teaser rates are an outrage, the ultimate responsibility for strong lending standards used to be among those who BUY THE LOANS from the banks.
Now that we know some of these banks are “too big to trust”, a solution may be to require prime lenders to retain 5%, alt lenders 10%, and subprime lenders 20% of what they write. With no commingling of loan types or lending divisions. And no gov guarantees.
There’s your 20%.
Most people now agree that zero down is a bad idea. Of course the only loan in town today is an FHA loan requiring 3.5% down, not much more than zero. This arose out of a need to jumpstart loan making when banks stopped lending, not many months ago as you may recall. The folks at FHA likely concluded that their efforts would be undermined by a higher down payment requirement. After complaints, they raised the down requirement a 1/2% from 3 to 3.5%.
With the real estate market in about the same shape now as then, other folks obsessed about avoiding a repeat of the crash have presented 20% down as the tipping point – enough skin in the game to prevent default. Default is however not determined by one’s original equity in the game, but by conditions NOW. And no down payment rule would protect lenders from loss in the kind of crash in values we’ve had.
A better protection would be to make sure loan applicants can pay for the loan they apply for, in other words AN END TO TEASER OR STARTER RATES. The proof that these are a FRAUD is that they are never offered on fixed loans, because the intent is to lure people to adjustable loans.
Without a FIXED loan, you will never achieve a paid for home and a secure retirement.
Sadly, an entire new crop of defaults is being planted as we tweet, because we all know that some people are STILL using adjustable loans with interest rates bound to rise a lot over time. The TEASER rates are just the icing on that cake. Maybe adjustable loans as a whole should be eliminated.
If the Banks and Lenders continue to use the criteria in effect for qualifying for a mortgage today, there shouldn’t be a restriction on a down payment amt. With that said; The Gov. needs to get out of the mortgage market, except for VA loans which need tweeking as well, similar to Ca. CAL-VET loans where the lender holds deed to the land and the buyer holds equity title. Fannie and Freddie should go bye bye! Home ownership is a privilege not a right. Get rid of the idiots in Washington who think the other way around, and you won’t have any more problems. At least for now!!
FHA lending, with it’s 3.5% down that can come from 100% gift funds isn’t “skin in the game”. Homes purchased with FHA financing are upside-down in a matter of months. I doubt there’s any statistical proof, too,
that FHA borrowers pay extra toward principal to buy out of the MI any faster than Fannie/Freddie borrowers with MI on loans greater than 80% LTV.
Making borrowers come in with 20% down is a great idea for curbing default rates. It’s also going to bring the housing market to a screeching halt in all but the lowest housing cost areas of the U.S. if ever implemented. Borrowers in California are already taxed to death, and with the cost of living here and the current economy you can forget someone having $70,000 to put down on a $350,000 “average” home.
But the bigger facet of QRM is the 5% retention rule imposed on lenders for non-QRM loans. That’s going to be the bigger deathblow to housing financing. Competition in the lending business will be among the nations biggest, most capitalized banks and everyone else will need to be “sterling” and with a down payment of 20% to get a loan elsewhere.
Also — dear Author — Dodd Frank was in reaction to the “too big to fail” situation. And while much of that was the result of sub-prime lending practices, it’s also worth noting that the FEDERAL GOVERNMENT penalized banks and lenders in the Millenium Boom for NOT making risky loans! Now it’s the same government that wants to pretend they weren’t responsible for forcing sub-prime lending on everyone by implementing a completely UNREGULATED, ONE-MAN RUN bureau with sweeping legislative and oversight (CFPB) as part of Dodd-Frank. There’s nothing for sensible Republicans to do BUT to do everything possible to ensure that the CFPB is a PANEL of individuals, not one man.
Certainly having “skin in the game” keeps people committed and less likely to default, but if you look at the default rates for low or no down payment loans like FHA and VA you’ll see that they have a much lower default rate than the problem loans, which were primarily sub-primes. So money down is not the decisive factor.
Some argue that VA loans have low default due to the honor inherent of the borrowers, and while I wouldn’t argue against that they also have additional incentives and support, like foreclosure counselors who will get them additional time to get current and the fact that a VA foreclosure stays on the vet’s record for ever. FHA loans like VA have special underwriting and guidelines which do not allow teaser rates and IO payments, so borrowers, while they may not have a lot of money upfront, are paying down principal right away and FHA borrowers are incentivized to get to the 80LTV mark ASAP by the hefty monthly MI tacked to those loans.
So really it comes down to the UW guidelines and making sure borrowers are qualified and that we’re not using “teaser rates” to enable people to buy but not stay in their homes.