New Rule Pushing Big Down Payments Could Make Homeownership Unaffordable

Among the most hotly contested ideas bank regulators have proposed to reduce the risk of another financial crisis is rule making a 20 percent down payment mandatory on some new home loans. Consumer advocates, civil rights groups and lending industry groups alike have said the proposed rule would deter many families from ever buying a home.

A new survey by the National Foundation for Credit Counseling could shed light on the actual effects of the proposal: The survey found that half of the 1,000 people contacted thought they would never be able to put together a 20 percent down payment to buy a home.

And the situation that would be created by the proposed rule, introduced by the the Federal Deposit Insurance Corporation in March, might end up being even worse than the survey suggests.

"Since prices for homes are at historic lows, the necessary down payment represents a lower dollar amount than would typically be necessary," Gail Cunningham, a spokesperson for the NFCC, said in a statement. "Nonetheless, consumers still do not feel capable of meeting the requirements."

Almost 40 senators asked bank regulators to modify the proposed rule last week, Reuters then reported. The senators described the proposed rule as hazardous to homebuyers, families and the housing market all at the same time.

During the boom years leading up to the financial crisis, banks and other financial institutions that sold loans to individual homebuyers built hefty profits with fees they charged borrowers. Some also bundled and then resold the same mortgages to other investors. When banks sold these bundles they didn’t just sell the value of the underlying mortgages; they also offloaded all the risk of default onto investors. The mortgages became someone else's problem.

Some analysts have blamed the financial crisis on these practices in recent years. Others have blamed inflated appraisals and homebuyers who bought more house than they could afford.

To cut down on all three, the proposed regulations would require banks to hold on to 5 percent of the risk associated with bundled mortgagees, or mortgage-backed securities. Only loans made to borrowers who put 20 percent or more down would be exempt from the 5 percent holding rule. Opponents of the rule say the fix will just lead to lower interest mortgages for people with larger down payments and more expensive loans or none at all for those who don't have 20 percent to put down.

Enacting the proposed 20 percent down payment rule, sometimes referred to as the qualified mortgage exemption or QRM, could further complicate the depressed and double-dipping housing market. Sales prices around the country hit new lows in March since the real estate bubble burst in 2006. The nationwide home price index fell by 4.2 percent in the first quarter of 2011 and nearly 13 percent of the nation's housing stock is sitting vacant. The problem, analysts say, is the volume of homes on the market, the number of foreclosures that are pending and the number of Americans who can't find work.

In April, trade groups such as the National Association of Realtors, the National Association of Homebuyers and the Mortgage Bankers Association and consumer lobbying groups including the Center for Responsible Lending took the unusual step of issuing a joint report denouncing the proposed 20 percent down payment requirement. A jointly released report said:

“Based on 2009 income and home price data, it would take almost 9 years for the typical American family to save enough money for a 10 percent down payment, and fully 14 years to save for a 20 percent down payment. A 20 percent down payment requirement for the QRM means that even the most creditworthy and diligent first-time homebuyer cannot qualify for the lowest rates and safest products in the market.”

But not all economists think the rule is a bad idea.

All three lobbying groups have an incentive to oppose a rule that would keep families out of the housing market. Real estate agents and mortgage bankers want to sell more homes, said Dean Baker, co-director of the Center for Economic and Policy Research, and some consumer advocates want to advance the idea that homeownership is essential.

"There were a lot of groups, some of these same groups opposed to this rule, who spent a lot of time promoting this idea that homeownership is an excellent idea for everyone, the path to the American dream and middle class status," said Baker. "The results have been sad, if not tragic for a lot of families."

Shrinking the pool of people who attempt to purchase a home to those who are truly qualified will reduce the number of mortgage defaults, Baker said. And, because there are already so many homes on the market, housing prices would just keep falling to a more affordable and realistic zone, Baker said.

Last year, there were a number of homebuyers who did manage to buy and put 20 percent or more down. But nearly 40 percent did so with a lot less, according to Core Logic, a data analysis firm.

Bank regulators will continue accepting public comments on the proposed rule until June 10. They are also considering another rule that would require down payments lower than 20 percent.