Higher Down Payments Hurt Homebuyers, Says Report

Several federal government agencies including the Treasury Department and Federal Housing Finance Agency are reviewing public comments concerning a new proposed mandate to raise the minimum down payment …

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Several federal government agencies including the Treasury Department and Federal Housing Finance Agency are reviewing public comments concerning a new proposed mandate to raise the minimum down payment for mortgages to 20%. The provision stems from the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and was designed as a way to encourage more responsible lending and borrowing, but the Center for Responsible Lending argues the move will push prospective homebuyers out of the market, and only serve to further harm an already struggling housing market. For more on this continue reading the following article from TheStreet.

Requiring prospective homeowners to put a 20% down payment on a property to qualify for a mortgage would push many of them out of the already ailing housing market, says the Center for Responsible Lending.

According to the group’s latest report, 60% of otherwise creditworthy borrowers would either have to forgo buying a house or take a high-interest loan should federal regulators institute the provision spawned by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 that is under consideration.

Mandated down payments would be particularly detrimental to African-American and Latino borrowers, the CRL says, excluding 75% and 70% of each group, respectively, who would likely qualify for fairly priced mortgages.

The findings are based on an analysis of mortgages originating in 2000-08 that looked at what would have happened had a 20% down payment been imposed.

The report was compiled as federal regulators including the Treasury Department, Federal Reserve Board, Federal Deposit Insurance Corp., SEC, Federal Housing Finance Agency and Department of Housing and Urban Development review public comments on a proposal changing the qualified mortgage requirements. There is no timeline for when final decisions will be made.

The CRL’s findings are particularly problematic when considering the difficulty of getting a competitive home loan even without a down payment mandate. According to The Wall Street Journal, the 10 largest banks in the U.S. rejected 26.8% of mortgage loan applications in 2010 — up from 23.5% in 2009.

According to the report, mandating high down payments should not be necessary, as the Dodd-Frank Act’s ban on loans with the highest risk of default fixes the bad underwriting that sparked the housing crisis. While higher down payments do result in fewer defaults, the payoff is small relative to the number of creditworthy households that could be shut out of the market, the CRL says.

This article was republished with permission from TheStreet.

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