If you’re anticipating buying your first home you can add one more hurdle to jump if proposed legislation affecting home ownership is approved - a bigger down payment.
A recent report conducted by the UNC Center for Community Capital and the Center for Reponsible Lending maintains that proposed legislation requiring 20 percent down payments will hinder the ability of minorities to afford becoming a homeowner and affect nearly 60 percent of all credit worthy home buyers.
The study concludes that although potential home buyers from a diverse economic makeup would be impacted, nearly three fourths of African-American and Latino borrowers could be left out of the home owner population if the legislation passes. According to Ginna Green of the Center for Responsible Lending, this is due to the fact that historically, these demographics have made less, on average, than their white counterparts.
Green note that, "If you're requiring homebuyers to actually save a 20 percent down payment in advance of buying the home, it would take decades for many families to amass that kind of money even though they could still afford to make those monthly mortgage payments.”
"African-Americans, Latinos, teachers, firefighters, anyone who is working-class and having trouble making headway in this economy will have even more trouble if these guidelines were to come to fruition," continued Green. "It's like the pendulum has swung from one side to the other in the housing market. On one end, minorities got the riskiest loans, and now, on the other end, minorities are going to bear the brunt of these onerous down payment requirements."
The proposed requirement is part of the regulations enacted through the recently passed Dodd-Frank Act, which is an attempt to rein in some of the shaky (and in some cases outright criminal) lending practices which put the real estate industry into a tailspin.
Nothing is set in stone, however, as federal regulators are still ironing out the details, but all are agreed that something needs to be done not only to help the economy, but to ensure that the subprime mortgage fiasco doesn’t happen again.
Although the proposal doesn’t require 20 percent down for all borrowers, it does require that lenders who make loans with less of a down payment keep at least 5 percent of the risk in house rather than shuffle it all off their books. A natural result would likely mean an increased interest rate for the borrower.
It’s human nature. Individuals who make the effort to save and invest more into a home purchase will be much more willing to do whatever is necessary to hold onto their investment. Researchers found this out when they observed that the default rate was 7.1 percent in cases were loans required more money down as opposed to almost 10 percent of FHA loans which normally require only 3.5 percent down.
Dean Baker, co-director for the Center for Economic and Policy Research disagreed with the report’s findings. “I know of almost no planet where a slight increase in the cost of getting a mortgage will shut out 60 percent of creditworthy borrowers. On my planet, we just had a horrible housing bubble burst and wreck the economy for a decade in large part because banks were able to pass on junk mortgages at no risk. This is an incredibly modest provision that will have no impact on creditworthy borrowers."
Mark Zandi, chief economist at Moody's Analytics, felt that the proposed requirements are too stringent. He said "I think a down payment requirement of 20 percent is too high. I'd like to see more like 10 percent."
Zandi is also of the opinion that the government should play a bigger role in the maintenance of these kinds of mortgages. "The very important thing to remember here is that when policymakers figure out what the future of mortgage finance looks like, it's very likely that the government will only be able to play a role with loans that meet these requirements,"said Zandi.
"With a 20 percent down payment, only one-third of loans would fall under their guidance," continued Zandi, "but if you lower the down payment requirements, the government could oversee closer to two-thirds of the loans, which is where I'd like to see them be."