20% down

guest commentary by Ethan Nobles writing on behalf of the Mortgage Bankers Association of Arkansas. He can be reached at [email protected]

With all the mortgage reform news flying around these days, it can be difficult to keep up with the latest developments.

There is, however, one issue of which consumers need to be very aware — a proposal from federal regulators mandating that private lenders require a 20% down payment on mortgages for all but the most credit worthy borrowers. Think about that for a minute – unless a consumer has an impeccable credit score, he or she could be looking at coming up with a lot of money to purchase a house through a conventional mortgage.

If, for example, that home sells for $150,000, then we’re talking about a down payment of $30,000. That would prove prohibitive for a lot of buyers, thus retarding the growth of housing markets that are still struggling.

The rationale behind that so-called risk retention rule is simple enough. Risky loans gave rise to the foreclosure problem that still plagues the housing market, so the notion is that requiring that 20% down from all but the least risky borrowers will curb mass defaults in the future is sound enough. One must wonder, however, if such a move isn’t the very definition of overkill.

Worse yet, that move could drive more people into loans backed by the Federal Housing Administration (FHA). There’s already a precedent for that — when the subprime lending market all but dried up in 2007, a lot of borrowers who would have taken out mortgages through the lenders operating in that realm turned to the FHA.

The end result of all that activity was that Congress and FHA officials became concerned about how much cash was on hand for the administration. The FHA was required to up its credit requirements and charge some extra fees to keep more money on hand.

The FHA — and some other federally-backed mortgage requirements — would be exempt from the 20% down requirement. It’s not hard to imagine, then, that stricter conventional loan requirements would cause more people to seek out federally-backed loans. Considering how a large influx of people looking for federally-backed loans has already resulted in stricter credit requirements and more fees for FHA buyers, it’s very possible that more interest in those programs could result in another round of reforms that could freeze out more borrowers.

In fact, there’s a proposal floating around Washington now that would impose a higher down payment requirement on FHA borrowers, moving from the current 3.5% to 5% down.

The point to all this is that mortgage reforms are largely connected. Raising the requirements in one area may well directly impact other areas and consumers owe it to themselves to keep up with what’s going on in Washington. Reducing the risk that bankers take on is a great idea, but overreacting too much can prevent a good number of qualified buyers from taking out mortgages.

We’re sure to see some mortgage reforms coming out of the nation’s capital in the months to come. Whether we’re looking at higher down payments, stricter credit requirements or a combination of both with some other changes thrown in for good measure remains to be seen.