Wednesday, May 25, 2011


As federal regulators debate whether to save, reinvent or shut down mortgage giants Fannie Mae and Freddie Mac, there has been increasing discussion of what mortgages should look like going forward.

One provision of the newly-enacted Dodd-Frank Wall Street reform law requires lenders to hold on to at least 5% of the credit risk for anything other than a "safe" mortgage, which is defined in part as a mortgage with higher credit scoring requirements for the borrowers and a minimum 20% down payment.  Because smaller lenders simply do not have the reserves to carry 5% of the credit risk for very many loans, smaller down payment programs are very much at risk.

So should 20% down payments become the "new normal" for home ownership? 

Space doesn't allow me to adaquately explain all the reasons this will destroy the housing market, so let's just start with a few common sense items:

* A 20% down payment requirement will eliminate 75% of first-time buyers, destroying values at the entry level.
* A 20% down payment requirement will simply be unaffordable for higher end homes, destroying the high end of the market.
* With home prices down by 10% - 40% in different parts of the country, and interest rates currently below 5%, the market should be a less risky place for lenders, not one that's more risky.

In other words, now is not the time to be nailing the barn door shut on home ownership.  With Fannie, Freddie and FHA touching nearly 90% of the loans being made today, any talk of a mandated 20% down payment requirement for home ownership is absurd, and it makes me think the regulators and politicians talking about it are either ignorant, stupid or simply looking to shake down the real estate and lending industries for additional campaign contributions.

Any way you slice it, this is a bad conversation to be having.

This does not mean we should go back to the old way of doing business.  But it does mean that the market of today is fundamentally safer than the market of five years ago (except at the high end of the market), because the people who never should have been allowed in have mostly been flushed out of the ownership market. 

But enough already with trying to correct the mistakes of 2005.  It's 2011, and we need to be finding new ways to make home ownership safe, enticing and affordable.  Instead, we've got regulators who think the only way to save the market is to utterly destroy it.