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Us - Down Payment Rules Are At Heart Of Mortgage Debate

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The housing market is showing signs of life, as home prices rise and mortgage-backed bonds return. But the revival may not gain full steam until regulators sort out one of the thorniest problems: the appropriate size of a down payment on a house.

After the housing collapse, initial reform proposals emphasized the need for buyers to put down a large chunk of money. The reasons seemed sensible and obvious. Many of the mortgages that went bad involved tiny down payments — if any at all — and studies have shown that borrowers with a larger amount of equity in their homes are less likely to default.


But in a surprising reassessment of the causes of the housing mess, many lawmakers, lenders and consumer advocates are now cautioning against rules that would require many borrowers to come up with significant down payments. Their main concern is that such efforts could end up cutting the supply of mortgages to lower-income borrowers, who simply do not have the money put down. They also contend that the subprime debacle has distorted the issue.

“The problem with this conversation is that it’s like discussing the future of shipbuilding from the deck of the Titanic,” said Roberto G. Quercia, director of the Center for Community Capital at the University of North Carolina at Chapel Hill. “There’s a lack of perspective.”

Professor Quercia studied mortgages in a special program for low-income borrowers, typically those with minimal down payments. From 1998 through the end of last year, 5.5 percent of the mortgages ended up in foreclosure, he found. Subprime mortgages made during the last housing boom, regardless of down payment size, had far higher foreclosure rates, roughly 25 percent.


Consumer advocates make a nuanced case. They do not deny that down payments reduce the risk of default. But they say defaults can be reduced almost as much by applying other rules that curb lending to certain types of borrowers.

Consider another set of mortgage rules, already put in place this year. These regulations emphasize the affordability of the loan. Under them, a borrower’s overall monthly debt payments cannot exceed 43 percent of personal income.

In his study, Professor Quercia of the University of North Carolina found that loans that complied with those rules defaulted at a relatively low rate during the housing bust. About 5.8 percent of them went bad, irrespective of how much the borrower put down.

He then calculated the losses on loans to borrowers in the same group who had down payments of at least 20 percent. The default rate on that smaller group was lower, at 3.9 percent.

The outcome of the down payment debate has major implications for the mortgage market.

What has the foreclosure rate been for those on higher incomes? Hard to draw any conclusions from this without some figures to compare to higher income areas?

Not sure I'd like a loan taking up 43% of my household income and if that's being used as a threshold it's far too high especially for low incomes. A hight rate like that may be OK if you are on a large salary, but a low income individual it seems financial suicide.

So if you don't have a deposit would putting a maximum percentage of income make sense?

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  • 242 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?

      • down 5% +
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      • Even
      • up 2.5%
      • up 5%

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