Will I really need 20% down for a home?
Regulators trying to stave off the next housing crisis are getting slammed by the reaction to restrictive mortgage rules.
This post comes from Marilyn Lewis at MSN Money.
Some people are freaking out over talk that 20% down payments could become a new requirement for buying a home.
Washington Post columnist Michelle Singletary, for example, worries that "Proposed 20% down payment rule could put owning a home out of reach for many."
Mortgage columnist Kenneth Harney says:
Opponents have estimated that the combination of restrictions would squeeze the majority of first-time buyers out of the market, along with anywhere from 30 to 40% of conventional mortgage borrowers overall. For minority group and moderate income loan applicants, it would erect a nearly insurmountable roadblock -- and eliminate any possibility of a robust housing recovery.
Well, freak no more. Yes, indeed, the possibility is being floated. Federal regulators have been talking up the idea while considering how to rewrite consumer rules for government-backed mortgages, the cheapest kind.
But while the final rule is not yet written, it seems unlikely to pass because of vociferous reaction against it.
Correcting sloppy lending
Not that it's a completely crazy idea. Supporters "say the new regulations represent a return to practical underwriting standards and would dissuade lenders from making and selling risky loans," writes the Post-Star, in Upstate New York.
The Post-Star talked with Glens Falls National Bank and Trust Co. CEO Tom Hoy, who thought "the long-term effect could be positive."
"People are consumed with the philosophy that everybody has to have their own home. But if we push people into situations they are not able to handle, it creates the debacle we had," Hoy said of subprime mortgages.
Seeking Alpha blog recently pointed, in a posted entitled "One chart that explains the entire financial crisis," to a correlation between falling rates of homeownership in the U.S. and the rising home purchases with 3% down payments.
Need for change
To understand the need for change, dial your Way Back machine back a few years to the housing bubble, circa 2003 or 2004 or 2005, and remind yourself how shoddy mortgage loans were flying off the shelves at mortgage lenders. Post continues after video.
Your gut told you there probably was something wrong with these get-rich-quick real-estate deals but it was pretty impressive watching your neighbors flip homes and vacation off their home equity.
Fast-forward to 2010 when the Dodd-Frank Act was signed into law. It was Congress' effort to correct problems that had led to recession, including that loose mortgage lending.
Says mortgage columnist Harney:
The 20% minimum down payment concept was part of a joint proposal from six key agencies -- the Federal Reserve, the FDIC, Securities and Exchange Commission, the Department of Housing and Urban Development, the Federal Housing Finance Agency and the Comptroller of the Currency -- to create a uniform national standard for "safe" mortgages in compliance with last year's Dodd-Frank financial reform legislation.
The law requires companies selling mortgage securities to keep 5% of the loans they make -- an effort to force lenders to be more conservative. As the housing crash demonstrated, risky mortgages create problems for the whole economic system.
Lenders selling mortgages on the secondary market -- "an extremely common practice among banks -- will have to meet the 'Qualified Residential Mortgage' standards," writes the Post-Star:
The loans would need 20% down; the property has to be owner-occupied; and the mortgage bill can't exceed 28% of the buyer's gross income.
FHA loans, which currently require a 3.5% down payment, are exempt.
There's lots of money riding on this definition of what a "Qualified Residential Mortgage" should be. Lobbyists, Realtors, mortgage bankers, home builders and other industry groups are up in arms about the 20% down payment idea.
But they're not the only ones. At least 320 senators and representatives also have objected, saying a down payment requirement was not what they intended when writing the Dodd-Frank bill. Says the Post-Star:
The proposal has spurred a vociferous reaction from some lawmakers, consumer organizations, lenders, real estate professionals and insurers, who say it would stifle the housing recovery and prevent a majority of buyers from obtaining loans.
… it would take more than a decade for a family with a median household income to save enough for a 20% down payment. A 10% down payment would take a family more than eight years to save. The impact on minority and first-time homebuyers would be even worse ….
The law's intent, says Harney, was really just to …
focus on sound underwriting -- full documentation of borrower income and ability to pay, the availability of mortgage insurance for lower down payment loans and reasonable credit requirements -- to create a broad base of safe mortgage lending at favorable rates.
The comment period on the suggested rule ended Aug. 1. The Federal Reserve won't say when the final rules will be announced or what will be included.
Harney, however, predicts that the 20% rule is dead in the water:
The coalition has flooded congressional offices with complaints against the proposal in recent weeks, culminating in an announcement June 22 that majorities are now in place in both houses of Congress to torpedo the regulators' plan by legislation, if necessary.
More on MSN Money:
MORE ON MSN MONEY
VIDEO ON MSN MONEY
As for myself, I received a conventional mortgage loan which required 5% down. I am doing just fine. The moral of the story? Know your financial limitations and be disciplined when purchasing a home. It is a big responsibility.
Canada pretty much required a large down payment when we were giving them away in Cracker Jack boxes. I read once where it was 20%.
They are not in this bad situation at this time. Their country stayed out of this mess for the most part.
To be a little bit conservative is not a bad idea. "There is no such thing as a free Lunch"., Zig Zigler.
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