To prevent a repeat of the housing debacle of 2007-2010, when some 5 million homes were lost to foreclosure, federal agencies are considering a mandate that would require borrowers to put 20% down before being OK’d for certain mortgages. For the average U.S. home, which now runs $272,900, that would mean a down payment of $54,580. What effects would requiring a 20% down payment have on borrowers, and the real estate market? A new study finds it’d have dramatic — and mostly negative — short-term effects on the housing market.
Enacted in 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) requires the Federal Reserve, the Department of Housing and Urban Development, and other agencies to write the criteria for what constitutes a reasonably safe mortgage, also known as the qualified residential mortgage (QRM) and the qualified mortgage (QM). The first response from these agencies was to propose a mandate that all owners put 20% down to qualify for a QRM mortgage.
A new study entitled “Balancing Risk and Access: Underwriting Standards for Qualified Residential Mortgages” from the Center for Responsible Lending at the University of North Carolina states that while such requirements would result in fewer defaults, they nonetheless “would be a mistake for business and consumers.”
Mandating a 20% down payment, the report states, would push 60% of buyers out of the QRM market, though many might still qualify for higher-cost loans. African-American and Latino buyers would be hurt the most, with up to 75% unable to qualify for a QRM if down payments were set at 20%. Even requiring a 10% down payment “would hobble a healthy segment of the housing market,” according to the report.
The study acknowledges that stricter regulations would reduce the number of foreclosures in the future, but at a high cost—specifically, that it would also cut off many borrowers who are highly unlikely to default. The study’s authors write:
“We find that imposing 80 percent loan-to-value (LTV) ratio requirements on qualified mortgages (QM) would exclude 10 otherwise creditworthy borrowers to prevent one foreclosure.”
“I know of almost no planet where a slight increase in the cost of getting a mortgage will shut out 60 percent of creditworthy borrowers. On my planet, we just had a horrible housing bubble burst and wreck the economy for a decade in large part because banks were able to pass on junk mortgages at no risk. This is an incredibly modest provision that will have no impact on creditworthy borrowers.”
While the standards for the QRM and QM will be heavily debated over the next year, it’s unlikely any decisions will actually be made or implemented in 2012. Politicians tend to stay away from controversial housing policies, and potentially polarizing voters, during an election year.