Home > Mortgages > Regulators Push to Kill Low Mortgage Dowpayments

Comments 2 Comments

NoDownPayment_Eugene_Peretz_CCFlickrIf federal regulators have their way, the mortgage of tomorrow may look a lot like the mortgages of yesteryear, back when an old adage held that, “The only people who can get a loan are people who don’t need one.”

This week, the Federal Reserve and other banking regulators published a much-anticipated proposal for new regulations on banks and mortgages. The most controversial rule, and the most important for homebuyers, would require borrowers to make downpayments of at least 20% to qualify for a loan.

Low downpayments, in many cases as low as $0, “contributed significantly to the high levels of delinquencies and foreclosures since 2007,” according to the proposal.

Nonsense, consumer and homeowner advocates say. Even during the height of the mortgage crisis, mortgages with low downpayments had the same foreclosure rates as loans with higher downpayments, according to research by the Center for Responsible Lending.

[Article: Congress Votes to Kill Mortgage Program]

“This is very concerning,” says Kathleen Day, the center’s spokeswoman. “It could really hurt low- and moderate-income homebuyers, who had little to do with causing the problem.”

Banks would still be able to give loans with lower than 20% downpayments. But under the proposed rule, loans with lower downpayments and other features regulators view as risky would not win status as “qualifying residential mortgages,” which means they would not qualify for loans or insurance from Fannie Mae, Freddie Mac or the Federal Housing Administration.

The regulations would require banks to keep more non-qualifying loans on their books. During the housing bubble, banks made billions of dollars’ worth of risky loans. One practice, dubbed “liar loans,” encouraged borrowers to state their incomes on the loan application, with no requirements that they provide paycheck stubs or any other paperwork to substantiate how much money they made.

Banks were happy to give out these loans, even though they were at a higher risk of default, because they derived fees from making the sale. Next they sold most of the loans they wrote to third-party investors, often within days of the mortgage being signed. So when a high percentage of liar loans and other types of mortgages failed, it left investors and American taxpayers—not the banks—holding the bag.

[Resource: Get your free Credit Report Card]

By requiring banks to keep at least 5% of their riskier loans on their own books instead of reselling them, known as keeping “skin in the game,” regulators hope the banks will see it in their best interest to write fewer risky loans, and to ensure that the fewer high-risk loans they do write end up in foreclosure.

“When securitizers retain a material amount of risk, they have ‘skin in the game,’ aligning their economic interest with those of investors in asset-backed securities,” according to the regulators’ proposal.

Loan servicers—the companies that handle the day-to-day details of administering loans on behalf of investors—would be required to do a better job modifying mortgages when the borrower falls behind.

The proposal also would make it easier to modify a loan by easing restrictions on second mortgages. Currently, lenders or investors who control the second mortgage often kill modification attempts if it means they will receive less income from the new, rewritten mortgage.

Image: Eugene Peretz, via Flickr.com

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

  • Curt Sandfort

    The credit scoring model works well. “character” is prone to discrimination, and too much subjectivity. This proposal will take us back to the lending standards of the 1930’s. When FHA was created the standard term of a mortgage was 5-10 years. Imagine the ridiculousness of a 30 year mortgage? By the way, Mr. Maag, “liar loans” don’t exist anymore. They haven’t been around since 2008 or perhaps earlier. So 3-4 years later we will enact legislation that will have a devastating effect on the real estate industry to prevent a problem that is not even happening? America’s real estate industry NEEDS a secondary market that is supported by the government. Independent banks will not seriously lend money without a government guarantee. Implied, explicit, — no difference…there needs to be a government guarantee…….Period.

  • james woodall

    As a veteran of the yesteryear system of banking,the number one ingredient of a sound loan is character. Always has been and always will. The credit scoring system is fair but has it’s flaws. Nevertheless it is our best tool. Look hard at credit habits and history. Deeper than the credit score itself. Understand the applicant. Job history is a huge gauge. Last you must have fair-minded individuals making approval decisions who can make real life judgements on each case. Abandoning proven credit standards and methods and relying on statistics got us in this mess. Let’s go back to what works and a great character can get 5 percent down and a poor character does not score with 25 percent!

Credit.com receives compensation for the financial products and services advertised on this site if our users apply for and sign up for any of them.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team