There was a time when putting 20 percent down on a house was the accepted norm for most buyers.
A proposal to move back toward that standard in the wake of the housing meltdown, however, has produced an odd-bedfellow coalition of Democrats and Republicans, consumer advocates and bankers who fear that would leave homebuyers unable to afford loans and sellers unable to find buyers.
“It will put the final nail in the housing market,” predicted U.S. Sen. Johnny Isakson, R-Ga.
He was among legislators who called for tighter lending standards generally. But since passage of the Dodd-Frank Wall Street Reform Act, regulators working for more than half a dozen federal finance and housing agencies came up with rules that surprised Iaskson and others.
One in particular: a provision that calls for buyers to put 20 percent down for a “qualified residential mortgage,” an idea critics say would mean higher interest rates for buyers who put down less.
Some Dodd-Frank reforms are already in place, but Congress left details of others to regulators. The down payment rule is currently in a “public comment” period that’s been extended to Aug. 1.
The proposal would split home loans into two categories. One would be loans to buyers who put 20 percent down, and lenders would face few regulatory hurdles bundling those loans to sell as investment securities. It was the volume of subprime loans in such securities that helped precipitate the financial crisis.
The other loan category would allow smaller down payments but would require lenders to maintain at least 5 percent of the total value of their loans so they shoulder part of the risk. The intent is to ensure lenders thoroughly vet borrowers.
Isakson and others believe the second category would be subject to higher interest rates and could shut lower-income buyers out of the market.
“Loan rates would go up 3 percent because of the scarcity of the loans,” said Isakson, who ran a real estate company in metro Atlanta before his days in Washington. “With the housing market in the shape it is, it’s just ridiculous.”
Alicia Blackshear, a recently divorced truck driver, has a loan in process to buy a Douglasville home with a 3.5 percent down payment. She said 20 percent down would be impossible, and that higher interest rates would make buying a home more difficult.
“If you are going to have to pay 20 percent down, you might as well go on and rent,” she said.
Her monthly mortgage payment will be $500 for the $78,000 house she picked out. That is half of what she pays in rent, she said.
Joining Isakson in lobbying against some of the proposed regulations are Democratic senators such as Mary Landrieu of Louisiana and groups as diverse as the Mortgage Bankers Association and the National Urban League.
The Georgia Bankers Association also said proposed limits on debt-to-income ratio could have negative effects on home buying. For example, one proposal says buyers cannot spend more than 26 percent of their income on a monthly house payment.
That could prevent well-documented and financially appropriate loans from being approved, association CEO Joe Brannen told the regulators.
Others, however, note that 10 to 20 percent down payments and conservative debt-to-income ratios once were widely accepted, and the housing market grew.
“If we had kept 20 or even 10 percent down as a standard, I don’t think any of this would have happened in the market,” said Jim Grissett, adjunct real estate professor at Emory University and investment advisor with The Parthenon Group.
Grissett suggested the regulations could be phased in rather than imposed at once.
“We do need a transition,” he said.
The proposed regulations were meant to rein in practices including no-money-down home loans, interest-only loans with balloon payments and lenders’ failure to verify buyer income.
But regulators’ proposals go too far, critics say.
John O’Callahan, chief executive of the nonprofit Atlanta Neighborhood Development Partnership, told regulators in a letter that the provisions would affect low- to moderate-income Americans like those he works with. There is much more to loan security than down payment size, and studies show paybacks on well-documented loans with 5 percent down are as good as on loans with higher down payments, he said.
Like Isakson, Rep. Barney Frank, D-Mass., a primary author of the Dodd-Frank Act, expressed dismay at the 20 percent suggestion in a letter to the agencies writing the regulations, saying it “excludes too many otherwise qualified homebuyers.”
Grissett said having the 20 percent down loans sold as securities could help the housing market by setting standards that investors would feel comfortable with again.
“That takes the good part of the market and stabilizes it,” he said.
He admits to being a little old school — expecting as earlier generations did that people who buy a house should save for it, and that banks should retain some of the risk on loans they write.
He also noted that falling home prices mean a 20 percent down payment is not as much as it was at the height of the boom.
“If you can’t come up with that, maybe you shouldn’t be buying to begin with,” he said.
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