20% Down Rule Will Stifle Housing Recovery with Majority Unable to Buy

The 20% down payment rule threatens middle-income and minority borrowers’ ability to be home owners.

New evidence shows that the 20% minimum down payment rule proposed by federal regulators last year to prevent lenders from making risky loans would discriminate against millions of home buyers and devastate the ailing housing market.

A study released in January found that a mandated 20% down payment would exclude 60% of creditworthy borrowers and hit minority communities even harder, with up to 75% of African-Americans and 70% of Latinos unable to qualify.

To put this in perspective, a 20% down payment on the median U.S. home, which costs about $164,500, is $32,900. Who has $32,900 in easily accessible cash on hand? It would take the typical American family 16 years to save enough money for a 20% down payment and closing costs, according to estimates of 2010 median income and home prices from the NATIONAL ASSOCIATION OF REALTORS® and the 2010 national savings rate.

Gone too far

The rule discriminates against qualified buyers, forcing them into higher-cost loans or out of the market entirely. Under the proposal, home buyers with less than 20% to put down would be burdened with higher fees and rates — up to 3 percentage points more — compared with those who have the 20%. 

How does that help a real estate market inching toward recovery? It doesn’t.

Many agree the mandate is too severe. Roughly 12,000 (mostly negative) comments were filed by banks, civil rights groups, mortgage companies, and members of Congress last year when regulators originally proposed QRM.

There’s a better way

Regulators need to craft rules that encourage home ownership for all. In an interview with HouseLogic last August, Rep. Dennis Kucinich said, “Regulatory agencies have rightly proposed that QRMs include loan terms and practices that have been shown to be less likely to end up in default. But they must craft a set of rules that promote maximum home ownership for all eligible Americans, while simultaneously imposing a return to a … QRM that doesn’t allow for the predatory gimmicks of the last decade that left entire neighborhoods across America hollowed out.”

Responsible lending standards and the ability of the borrower to repay the loan are better ways of reducing the risk of default than simply eliminating middle-income borrowers from the buying pool. The housing market will not bounce back without access to quality loans.

Home ownership is the cornerstone of generational wealth. Along with peace of mind, home ownership provides equity to start a new business, pay for a child’s education, and build a foundation for financial security for future generations. When you take home ownership away from citizens, they’re less likely to climb the social ladder and become part of the middle class.

What impact do you think a 20% down payment requirement would have on the housing market and minority home ownership rates?