20% down payment is beyond irresponsible

How many buyers have enough of a down payment to purchase this house?(Flickr photo by Casey Serin)

I was in a minority of one last week in a discussion at the monthly meet-up of REwrite, a group of real estate bloggers and other journalists.

As issue is a mortgage proposal that requires a 20 percent down payment for the “safest mortgages.”  As I’ve already signaled in the headline, that notion is terrible, if well-intended.

Such a minimum means continued stagnation not only of the housing market — which desperately needs to absorb a mountain of distressed properties and an overhang of shadow inventory — but also of the nation’s economic recovery.

Imposing such a requirement would gravely crimp home building, the jobs that construction directly creates and all the work that subsequently results, including furniture manufacture and the services and products that home ownership engenders.

Although I was alone in expressing my position last week, I am hardly a voice crying out in the darkness.  Moreover, I don’t oppose the requirement as a real estate broker; in Manhattan, where co-operatives customarily demand at least a 20 percent down payment, the effect of the minimum proposed by federal regulators will be negligible. It also will be tempered by an exemption for FHA and Ginnie Mae loans nationwide.

In fact, lenders have for a couple of years refused to make mortgage loans to borrowers who couldn’t come up with at least 20 percent down, often considerably more.  If you’re wondering why the housing market has foundered for so long, that is one big reason along with matters of consumer confidence and high unemployment even at a time when interest rates are astoundingly low.

According to a National Foundation for Credit Counseling survey cited by the Wall Street Journal, nearly half of respondents said they could never come up with a down payment for a new home. Another 17 percent said they would have to borrow from family or friends. And 21 percent said they would need to get a low down payment if they used their own funds.

The Dodd-Frank Act wants to be sure that lenders have a swath of skin in the game so as to prevent them from selling bad loans that are packaged into securities.  The law says that the lenders must book 5 perent of credit risk for all mortgages except those in which the borrower makes a 20 percent down payment.

The reasoning is clear: If borrowers themselves can lose substantial sums in the event of their default on the loans, the likelihood of default is greatly diminished. But for loans to borrowers without a big down payment, lenders are to assume the risk instead of them.

Well, surprise! Institutional lenders don’t want to book any risk at all.

I’ve contended in the past that I see no justification for encouraging the vaunted American Dream of home ownership, but I firmly believe that an arbitrary minimum down payment is an insupportable idea.

If a prospective borrower has superb credit, a good job for an extended period of time and otherwise appears to be a responsible, upstanding member of the community, that is an individual who should be considered “safe.”  That is an individual who should not be denied a loan for an absolutist reason.

The vigor of campaigns led by the National Association of Realtors, the National Association of Home Builders and, and on the other side, consumer groups as well has resulted in a nearly two-month extension, until Aug. 1, of the comment period for the proposed mortgage lending rules.  Just yesterday, my friend Phil Faranda, owner of a Westchester brokerage, provided his own perspective on the minimum requirement.

I find it oddly disconcerting to be on the side of certain lobbyists and legislators of stripes different from mine, but this issue has made for a collection of strange bedfellows.

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Malcolm Carter
Licensed Associate Real Estate Broker
Senior Vice President
Charles Rutenberg Realty
127 E. 56th Street
New York, NY 10022

M: 347-886-0248
F: 347-438-3201

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