Increase for Home Down Payments Proposed by Wall Street
Amidst the unemployment and real estate crisis that the country is still experiencing, Wall Street is proposing an amendment to the current standards of a qualified residential mortgage (QRM). Where currently, the standard down payment amount is 10%, an increase to 20% has been proposed. The down payment increase will be accompanied with lower interest rates for borrowers and more flexibility for lenders.
The 20% down payment standard hasn’t been exercised for some time now. By 2000, 10%, 5%, and even 0% down payments were negotiated between borrower and lender without an in depth evaluation of a borrower’s ability to pay. It was common for borrowers to piggy back 80% of the loan with a second mortgage of 15% or more to avoid private mortgage insurance (PMI). Then came the housing/real estate market crash which basically did away with the 0% down payment (except to a few well qualified buyers) and the 10% down payment became the standard.
The proposal will be towards the Wall Street reform bill (the Dodd-Frank), which was passed by Congress in 2010. The Dodd-Frank makes it against the law for a lender to provide a mortgage to a borrower without properly assessing their ability for payment. Under the Dodd-Frank are the standards for a qualified residential mortgage, which will be effected by the proposal:
Proposed New Rules for Qualifying Residential Mortgages
20% down payment
Can only be written for borrowers who have never been more than sixty days behind on their mortgage
Loans backed by Fannie Mae, Freddie Mac and the Federal housing Administration (FHA) would be exempt from the above two rules
This is a great proposal, but being presented at the wrong time. With unemployment rates still high, homeowners are currently unable to pay their current mortgage timely, which violates the second rule proposal of not being sixty days behind. And secondly, no job or low wages due to being laid off, means no money, which violates the first rule of a 20% down payment. This proposal would be beneficial if presented after the housing/real estate market has stabilized and used to ensure its stability. If this proposal is to be approved, the small improvement gained in the housing/real estate market will stall. More and more borrowers will seek governmental assistance (which has already suffered budget reductions) and sellers may have to turn to foreclosure and short sales in response to lack of qualified buyers.