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