As federal regulators consider setting down-payment standards on new mortgages, a new study shows such rules could push 60 percent of creditworthy borrowers into high-cost loans or out of the market altogether.
A proposal by regulators to define a high-quality mortgage as one with at least a 20 percent down payment, or possibly 10 percent, would hobble a healthy segment of the housing market. While higher down payments do result in fewer defaults, the payoff is small relative to the number of creditworthy households who could be shut out of the market, the study shows.
The results are particularly striking for African-American and Latino home buyers. A mandatory 20 percent down payment requirement would exclude about 75 percent of African-American and 70 percent of Latino borrowers who could be successful homeowners from obtaining fairly priced mortgages.
The working paper, “Balancing Risk and Access: Underwriting Standards for Qualified Residential Mortgages,” was produced by the UNC Center for Community Capital and the Center for Responsible Lending. Researchers looked at mortgages originated from 2000 to 2008 and what would have happened if a 20 percent down payment and other underwriting criteria had been imposed beyond those already mandated by the Dodd-Frank financial reform law.
The study finds Dodd-Frank’s ban on loans with the highest risk of default — for example, those with prepayment penalties or no income documentation — fixes the bad underwriting that caused the housing crisis. Adding a down-payment threshold set by the federal government would do little to reduce defaults relative to the large number of creditworthy home buyers it would push from the market. These findings are particularly significant given that a stalled housing market is a key obstacle to economic recovery.
Topics(s): Affordable Homeownership, Default, Bankruptcy, & Foreclosure, Housing Policy, Mortgage Finance