Requiring bigger down payments won't stop a repeat of housing crisis

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The Boston Globe
By: Michelle Singletary
June 19, 2011

After a disaster, people often want to figure out how to avoid the debacle again. As we continue to deal with fallout from the housing crisis, regulators are proposing rules to prevent folks from getting into homes they can't afford. One would require borrowers to come up with a 20 percent down payment. If they don't meet this threshold, their loans would be considered more risky. It would not be a ``qualified residential mortgage,'' or QRM, and therefore the bank would charge more.

``Why, in a law intended to fix the mistakes that caused the credit crisis, would you mandate a certain down payment when low down payments were not the problem?'' asked Kathleen Day, of the Center for Responsible Lending.

I'm wondering the same thing.

In 2000, I met Agnes Howard, an 81-year-old who was in poor health and in debt. She had lived in her home in the District of Columbia for 46 years. Thanks to some shifty lender, she was persuaded to refinance several times to help pay off some credit card debt. She was assured she would reduce her monthly mortgage payments. Instead, the retiree saw her payment go from $132 to more than $1,300. Her income was $1,700 a month.

There were a lot of factors that contributed to loan defaults, but the lack of hefty down payments was not one of them. Rather it was making loans to people who had little or no chance to pay their mortgages.

Under the proposed rule, borrowers who can't afford a 20 percent down payment and who can't obtain financing through the FHA will be expected to pay a premium of 2 percentage points for a loan in the private market to offset the increased risk to lenders, according to National Association of Home Builders.

Like so many others, I want to be sure that our government fixes whatever broke the housing market. But if borrowers have to save a 20 percent down payment to qualify for the best mortgage deal, we will be putting homeownership out of the reach of a lot of people.

The proposed rule will create a ``class of newly designated high-risk borrowers, formerly known as the responsible middle-class borrower,'' said Marc H. Morial, chief executive of the National Urban League, in a letter to the six agencies charged with developing new mortgage regulations.

It would take more than a decade for the median American family to save enough for a 20 percent down payment on even a modest home, according to the National Association of Realtors.

Last year, an average first-time home buyer financed 96 percent of a mortgage, according to the association.

We won't stop a repeat of the housing crisis and predatory lending by making creditworthy people wait a decade or two before they can save enough to get the best mortgages. We stop it by putting in place rules that prevent what happened to borrowers like Howard, who should have never gotten a loan.

Michelle Singletary is a columnist for The Washington Post.

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