Why You DON’T Need 20% Down For A House

There’s been a lot of talk claiming that new mortgage rules will soon require borrowers to put down 20% down if they want to buy a home. Such talk is nonsense.

The alleged culprit in this matter is the Dodd-Frank Wall Street Reform and Consumer Protection Act. Having failed to prevent its passage, the lending industry is now trying to undo it piece by piece.

So what’s the big deal?

Wall Street reform establishes conditions under which lenders can be sued by borrowers. However, the law also says if lenders play by the rules they are protected against such suits if they make loans inside the safe harbor specifically created by the new rules.

20% down and the Safe Harbor

Loans inside the safe harbor are called qualified residential mortgages or QRMs. Despite claims that borrowers will soon only be able to finance with at least 20% down, the QRM rules say exactly the opposite.

To understand why you need to know which mortgages are inside the safe harbor. These loans include:

  1. FHA loans with 3.5 percent down.
  2. VA loans with as little as nothing down.
  3. Conventional loans with as little as 5 percent down; that is, loans sold to Fannie Mae and Freddie Mac.
  4. Portfolio loans, mortgages originated and held by lenders.

Not only will there be some loans available with little down under Wall Street reform, MOST loans — about 80 percent — will be available with little down. How do we know? Laurie¬†Goodman with the¬†Amherst Securities Group has testified before Congress that in total our mortgages are worth $10.6 trillion. Of these, $5.4 trillion are insured by Fannie Mae, Freddie Mac or Ginnie Mae and another $3 trillion are in lender portfolios.

20% Down and Lender Reserves

The problem for lenders concerns the 20 percent of all loans outside the safe harbor. When high-risk loans are made outside the safe harbor lenders must set aside 5 percent of the loan amount as a reserve. Money in a reserve generates less income then would otherwise be possible, and that’s a huge issue for lenders.

In essence, lenders want the right to make high-risk, high-profit loans with little or no reserve set-aside. That requires changing the rules under Wall Street reform so that more financing will be available without the possibility of borrower suits or that irritating 5 percent set-aside. This can be done by gutting Wall Street reform or by changing the definition of a QRM to the point where virtually all mortgages are within the safe harbor, including whatever high-cost financial swill lenders can dream up.

So the next time someone wails and moans about the “new” 20-percent down requirement for mortgages you can safely say there’s good news: Such fears are unjustified because huge numbers of loans with little down are available under Wall Street reform. You might also mention that the real issue is lender profits and the right to make high-risk mortgages.

You know, like the toxic mortgages at the heart of the financial meltdown, lower home values and massive numbers of foreclosures. Loans that for the moment do not meet QRM standards. The very loans that generated vast profits for big banks and brokerages and huge executive bonuses for top corporate leaders. And for you, what did you get?

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Posted in: Mortgages

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