A “Working Paper” documenting a study of mortgage default has determined that two possible options for reducing mortgage defaults would be to increase the required down payment to 15% or garnish the wages of defaulting borrowers.
The study, written by Juan Carlos Hatchondo, Leonardo Martinez, and Juan M. Sánchez, looks at an aggregate of data sets and other mortgage default related material. It is not light reading, as much of it is composed of complicated economic equations. But the gist of the report was that increasing down payments to at least 15% of the purchase price, or garnishing wages of borrowers in default would reduce the mortgage default rate by some 30%.
The study indicates that higher down payments will reduce home ownership by about 0.2%. But, in the case of wage garnishment, home ownership should actually go up about 4.3%, while housing prices could rise an estimated 16.1%. As the report puts it,
“The introduction of minimum down payments or income garnishment will benefit a majority of the population“.
Wage garnishment of delinquent mortgage payments is only a suggestion at this point. The study provides information that the Federal Reserve might use to help formulate new rules and regulations for the housing market. But the Fed could decide to implement such a rule if it so desires.
Under Dodd-Frank the Federal Reserve has been granted new powers to make rules to help protect consumers. These “working papers” or economic studies, published on the website of the St. Louis Federal Reserve, are used to help formulate those rules and regulations.
But the residential real estate market is already buzzing over the idea of “qualified residential mortgage” guidelines, which it appears, are set to initiate a requirement for borrowers to pay 20% down for mortgages that are “government backed” which could be sold as securities in the secondary mortgage market. The National Association of Realtors is already on record as strongly opposing the higher down payments, but it appears that higher down payments are indeed in the works.
The ability to garnish wages would be a controversial and radical step, as many borrowers might balk at the idea of buying a home if it meant they could be subject to wage garnishment.
I’m no economist, but I do know the challenges of keeping a roof over one’s head in the current economy. I’ve helped dozens of decent hard working folks try to avoid foreclosure after job losses. I know people who are in danger of losing their home after not missing a payment for ten straight years. They continue to try to find a way to make their mortgage payments to keep “their house” even though they owe twice what the property is worth. Somehow, the idea that these people could have their grocery money garnished to help pay a delinquent mortgage is pretty much unthinkable from my point of view. Yet there is some chance that this idea could be implemented.
One might gather from reading this study that if indeed the Federal Reserve were to implement a “garnishment rule” as part of the requirements for “qualified residential mortgages”, or any other type of mortgage, that the consumer base they are charged with protecting are not the folks who take out mortgages to buy homes, but the financial industry that consumes mortgage debt.