A 20% Downpayment Requirement?

Over the past several years mortgage and real estate industry analysts have been saying that the housing market would be further along to a more robust recovery if some reactionary restrictions in lending practices could be softened. This could be a pipe dream if a 20% down payment becomes a requirement.

Industry sources say six federal agencies, in addressing new lending issues via the Qualified Residential Mortgage (QRM) standards, have presented proposals that could potentially make 20% down payments an industry standard.

Critics of the proposals say that such a requirement could force many low-risk qualified first-time buyers to put off home ownership by as much as a decade or more. Taking out a high cost loan based on a lower down payment would be another option, but this could make homeownership not cost effective for many consumers, potentially pushing them out of the market altogether.

In 2012 a joint study released by the Center for Responsible Lending and the UNC Center for Community Capital found that this rule could push as many as 60 percent of credit worthy borrowers out of the market, or into high cost loans.

Other portions of the study found that provisions in the recent Dodd-Frank financial reform legislation…those that ban high-risk loans, such as no-doc or no income verification loans and those with prepayment penalties…were more than adequate in addressing issues of bad underwriting, in what many believe was the root cause of the mortgage and real estate housing crisis.

A 20% down payment requirement would indirectly be blaming low down payment loans as being a major culprit in said housing crisis. Nothing could be further from the truth. Low down payment loans have been successfully advocated and used since the 1930s via the FHA, and later through non-FHA loans. Low down payment loans have helped millions of qualified buyers become successful lasting homeowners.

If low down payment loans are eliminated then the current housing recovery will in all likelihood falter, and along with it any hopes of an economic recovery for years to come.

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