Shotgun Plan for Lending Industry Woes Disincentive to Home Ownership

Legendary investor Warren Buffet recently said: “Our country’s social goal should not be to put families into the house of their dreams, but rather to put them into a house they can afford.” And just like that, the billionaire businessman, who still resides in the modest Omaha home he purchased for $31,500 in 1957, summarized the cause of the mortgage market collapse and a solid plan to preserve the American dream for future generations. 

Home ownership isn’t to blame for the country’s economic crisis. Rather, it stems from lax lending standards, consumer inexperience, and the emergence of exotic products like interest-only and balloon payment mortgages, which let unqualified borrowers take out loans they couldn’t sustain. Regardless, the sanctity of home ownership has been tarnished and legislative attention has turned to banking and housing reform. 

In response, Congress required the federal financial regulators, including the Federal Reserve and FDIC, to protect investors from future fumbles by requiring entities that sell packages of mortgages to retain some of the risk, with a few exceptions. But some of the proposed rules will actually over-correct the problems and damage your ability to buy and sell a home. 

According to the plan, a buyer whose mortgage downpayment is less than 20% will be considered “high risk.” So lenders will charge more for these loans. 

Without revision, this rule would have a devastating effect on the housing market. By limiting the number of buyers defined as “safe,” property values will also take a plunge—a simple matter of supply and demand. 

Consider this question: Had you been required to cough up a 20% downpayment, could you still have purchased your home? If you answered “yes,” you’re the minority. In fact, only four out of 10 U.S. borrowers put down 20% or more on their home purchases last year. According to the Washington Post, in high-priced areas like Washington D.C., nearly all buyers put less than 20% down. In expensive markets where you can’t get much for under $450,000, 20% down would mean $90,000.

What’s the answer? The need for banking reform and better underwriting isn’t debatable. But the regulators’ 20% minimum-down plan is like killing a mosquito with a shotgun—overkill. A downpayment is just one factor to determine a borrower’s credit worthiness. Rather than over-correcting a single issue, why not implement some common sense practices that focus on the full picture: credit history, income, job history, and existing debt? In other words, use the borrower’s ability to repay the loan as the guide for whether or not the loan is “safe.” 

The proposed 20% downpayment rule is open for public comment until June 10, 2011. Find out more and submit your thoughts to the regulators.

Would you be able to buy a home if you were required to put down 20%? What do you think of these proposed regulations? Sound off.