20 percent down for a mortgage? It’s a mythby Peter Miller
Taken in some sort of literal sense, one can make the case that the above statement is both entirely misleading and completely truthful.
Parsing my first sentence is actually very important. It gets to the heart of a debate now going on in Washington–the question of whether we should return to the good old days of risky mortgages.
Let’s look at what that first sentence really says.
It’s true that borrowers will soon need–with a few exceptions–20 percent down to buy a home regardless of mortgage rates. This is because of requirements in the Dodd-Frank Wall Street Reform and Consumer Protection Act which was passed last year.
Many trying to change the 20 percent requirement
To solve this 20 percent “problem,” lenders and Wall Street brokerages want to change the rules so that you will be able–with a few exceptions–to buy real estate with less than 20 percent down.
Besides having borrowers put down 20 percent for risky loans, lenders will also have to set aside 5 percent of the mortgage amount in a reserve account and also face the possibility of borrower lawsuits. So, if we can change the rules and allow more loans to be made with less than 20 percent down, we can also make more mortgages which do not require a 5 percent reserve and protect lenders from borrowers and their lawyers. And, remarkably, if we can get rid of the 5 percent reserve requirement and the liability issue, we can greatly boost lender and Wall Street profits.
There are exceptions
But there are two issues with the statement that all of us will soon need to put 20 percent down to buy a home.
First: There are exceptions to the 20 percent rule. In fact, those exceptions represent about 80 percent of all mortgages, the very mortgages that you are most likely to want.
- VA loans with nothing down
- FHA mortgages with 3.5 percent down
- Conventional loans which routinely are available with between 5 and 10 percent down
- Loans originated by lenders and held by them in portfolio, loans which routinely have 5 percent and 10 percent down
Going back to our first sentence, it says there are exceptions, but it does not say how HUGE those exceptions really are and that they represent most loans. That’s keenly important because it means that the second part of the sentence–the business about 20 percent down–is not exactly true.
Second: Unmentioned in the first sentence is the little matter of risk.
- Those who want to change the rules want to make more loans which are not FHA, VA, conventional or portfolio loans (mortgages which are certain to have higher foreclosure rates than traditional financing). Just look at the foreclosure rates for subprime financing and option ARMs.
- You’ll have fewer foreclosures when people put down 20 percent because they have more to lose and lenders have more protection against falling prices.
What lenders and Wall Street really want is a license to originate tons of high-risk mortgages, loans that can be created without a reserve requirement and then packaged into mortgage-backed securities that produce massive fees.
To understand the logic behind this, remember that it was when home prices rose the most that bigger loans were created and home builder profits were maximized. (That would be the period just before the mortgage meltdown.)
And what happened next?
Housing prices peaked in early 2006, started to decline later in 2006 and early 2007, and in some places, still haven’t hit a bottom.
So don’t worry about it, you’ll plainly be able to buy a home with less than 20 percent down under the Wall Street Reform.