Government to mandate 20% down on all home loans – is housing doomed?

20% down required by the government?

Yesterday, FDIC chairman Sheila Bair said the industry would be best off if lenders required 20% down in order to secure a loan, noting on the Fox Business Network that the 20% standard “worked really well for decades” and that the 30% down requirement floating around would “go too far.”

Bair said that lower income buyers would not be left out as “other products can address their needs” and what was really important was a borrower’s loan to values.

Today, the reaction is strong

Numbers ranging from 5% to 30% have been bounced around for a few years now and it appears that Uncle Sam’s roulette wheel is landing on 20%. The National Association of Home Builders states that this would hamper the first time buyer market and for once we think they have understated it- we believe it would destroy, massacre, and kill the first time buyer market.

Furthermore, the NAHB states, “By stipulating a 20 percent borrower down payment for a loan to be considered a qualifying residential mortgage, the Administration and federal regulators are preempting congressional efforts to reform the housing finance system by imposing a narrow and rigid gateway to the secondary mortgage market.”

Other reactions:

NAHB Chairman Bob Nielsen said, “Millions of low down payment loans have been originated safely for decades,” said Nielsen. “Low-down payments are not what drove this lending crisis. It was lax underwriting standards. Unfortunately, regulators chose to focus on excessive down payment requirements as some type of silver bullet to solve the lending crisis when they should have looked at other underwriting failures and unsound mortgage products that produced the lending disaster.”

“The proposed rule establishes a standard for ‘safe and sound’ mortgages that would take the industry back to the 1980’s, when low wealth and moderate income borrowers, and particularly communities of color, were routinely barred from conventional, affordable credit. The proposed standard seems to ignore all the positive lessons lenders learned over many years of experimentation in how to offer sustainable mortgage credit. We are very concerned that when combined with other recommendations from the Administration’s White Paper on housing finance, including 10 percent down payment minimums for Fannie Mae and Freddie Mac mortgages, and possibly higher down payments for FHA borrowers, this proposal will move the lending industry’s goalposts unacceptably far from the reach of low, moderate and middle income homebuyers.

Barry Zigas, Director of Housing Policy at Consumer Federation of America said, “We are pleased that the proposals include at least a minimal set of servicing guidelines that would apply to all mortgage securitizations. We look forward to working with the regulators to improve and strengthen them. But there can be no doubt after the foreclosure debacle consumers have endured that clear standards are necessary.”

“Securitization provides financing for most of our credit- mortgages, car loans, credit cards, even financing for the buildings we work in. The collapse of this market led to the broad economic recession, and CRL supports reform of the securitization markets. The goal is to make the system safer, while still making credit available and affordable. The recent risk retention rules are an important part of this reform process. However, the proposed Qualified Residential Mortgage standards would unnecessarily over restrict credit and shut off homeownership to most working families. In particular, the down payment requirements of 20% would create an insurmountable barrier for most families, even though low down payment loans that are fully underwritten have performed well, even through the recent crisis,” said Mike Calhoun, President of Center for Responsible Lending.

REALTOR Magazine Senior Editor, Robert Freedman said, “NAR made its concerns clear in a letter it sent to banking regulators in January with other industry organizations. ‘It has been suggested that the QRM standard include a very high down payment requirement in order to limit QRM eligibility to some arbitrarily small percentage of the market,’ the letter says. ‘Creating an inordinately narrow QRM exemption could cause significant disturbances in the fragile housing market.’”

“Basically the government is telling Mr. and Mrs. America thanks for paying your mortgage during these tough times, and thanks for building your wealth around housing, as we have encouraged you to do, but we are now changing the rules. We are going to reduce the value of your retirement nest egg even more than the recession already has. And as an extra thank you, your kids are going to find homeownership that much more difficult to obtain,” said NAHB First Vice Chairman Barry Rutenberg.

What now?

Regulators must issue a rule defining “qualified residential mortgages” in coming weeks, but had originally planned to complete the proposal late last year. Disagreements over how to modify loans and what national loan servicer standards (like down payment requirements) should be structured. The new proposal is a comprimise among regulators but remains under fire.

Tell us in comments what you think of a 20% down payment requirement of all buyers- will it help or hurt the housing market?