Downpayment Proposals Could Close Door On Homeownership For Many

A proposal aimed at making banks more careful about the mortgages they make could end up forcing home buyers to come up with 10% or even 20% downpayments, some housing finance experts say.

“If the regulators impose a 20%—or even a 10%—minimum downpayment … hundreds of thousands of creditworthy households will be excluded from home ownership because of the dramatic increase in the wealth required to purchase a home,” the Consumer Federation of America, the Center for Responsible Lending, the NATIONAL ASSOCIATION OF REALTORS®, and the National Association of Home Builders said in a letter sent to last week to regulators.

A household earning the median U.S. income of $49,777 and saving 6% per year (about $3,000) would have to wait 14 years to save a 20% downpayment plus 5% for the closing costs needed to buy a median-priced home. With a 10% downpayment requirement, it would take 9 years, the letter said.

Finance reform
So far, the Federal Deposit Insurance Corp. and Federal Reserve have issued proposed rules based on the Dodd-Frank financial system overhaul Congress passed last summer. That law says banks must retain 5% of the risk of the mortgages they make and later sell to investors. The other banking regulators will also propose rules shortly.

Bank regulators will take comments until mid-June on the proposed rules and then announce a final rule.

Congress proposed the change thinking banks would be more cautious in their lending if they have to keep a portion of the risk of new mortgages. Legislators hoped the change would limit bank losses and reduce the likelihood that another bank bailout would be needed.

That 5% risk-retention rule wouldn’t apply to mortgages made to borrowers with good credit, ample income and savings, and a sizable downpayment. What the bank regulators are now deciding is what constitutes good credit and how much income, savings, and downpayment makes a borrower well-qualified for a mortgage.

First-time home buyers harmed
The argument over what’s a qualified residential mortgage could greatly affect home buyers as well as home owners who want to refinance their mortgages. If the regulators decide that a qualified residential mortgage must include at least 20% down, first-time home buyers would be especially hard hit.

A whopping 86% of first-time buyers put down 20% or less last year, according to data from the NATIONAL ASSOCIATION OF REALTORS®. Repeat buyers could also have trouble getting a mortgage—64% of them made downpayments of 20% or less.

While home owners who put down less than 20% would still be able to get mortgages, they’ll pay higher fees and their interest rates could be as much as 3 percentage points more than those considered “qualified,” NAR estimates.

Federal Housing Administration and Department of Veterans Affairs guaranteed loans aren’t covered by the proposed rule. But if the qualified residential mortgage rule makes 20% downpayments the norm for the mortgage market, FHA could be pressured to do the same to prevent huge increases in its already robust share of the market, adding roadblocks to sustainable home ownership.

By Dona DeZube for HouseLogic