Most people agree that buying a home without a down payment is a risky decision and soon it might not be an option. As the crippled housing market is beginning to see signs of improvement, lawmakers and key housing industry agencies are debating exactly how much down payment should be required.
Congress and a group of federal regulatory agencies are attempting to create new rules for mortgage lenders in order to avoid a future housing crisis. The loan would be known as “qualified residential mortgages.”
The Dodd-Frank law calls for financial reform and the setting of criteria for what would constitute a reasonably safe, basic mortgage. The agencies tasked with this, include the Federal Reserve, the Federal Deposit Insurance Commission, the Department of Housing and Urban Development and the Federal Housing Finance Agency.
The qualified residential mortgages would allow lenders issuing them to sell them to investors. In doing so, the lenders would avoid full risk associated with the possibility of a default on the loan. Other non-qualified residential loans, would be deemed riskier and, therefore, the lender would have to retain 5 percent ownership.
The law is aimed at prompting banks to take ownership and make sure that a borrower truly has the ability to repay a loan. In cases, where a riskier loan is made, and the standard of the qualified residential mortgage is not met, the bank would have to be prepared for a possible default and have set aside extra capital.
A 20 percent down payment is being considered but many are opposed, including banks, real estate agents, and consumer housing advocates. The opposition fears that a 20 percent or 10 percent down payment would price many homeowners out of the mortgage market.
Even if a borrower is creditworthy, coming up with the down payment could be a real stretch. It could take some borrowers more than a decade to save for just a 10 percent down payment.
The Center for Responsible Lending has created charts on its website ResponsibleLending.org to show how borrowers with different occupations would be impacted. According to the chart, it could take a U.S. Army Staff Sergeant, earning a median salary of just over $30,000, nearly 20 years to save for a down payment.
The opposition argues that for the creditworthy borrowers, the loan could cost them more because the lender would raise interest rates on their loans in an effort to cover their extra costs.
Kathleen Day, representing the Center for Responsible Lending, told the New York Times, “We’re not advocating for zero percent down. We think down payments are good. But we think the market should set them, based on the underwriting.”
Day says that underwriting (the process of looking at a borrower’s credit history and income and debt levels) should assess risk and determine a borrower’s ability to repay a loan.
Some loans, like those that can be obtained with a small down payment and are insured by the Federal Housing Agency, would be exempt from the qualified mortgage mandates.
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