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The federal government has been tossing around the idea of implementing a mandatory 20% down payment rule on new mortgages for a while.There’s been a lot of debate over the impact this could have on future homebuyers, and finally there are some hard stats available.
In a new report, the centre for Responsible Lending blasts the idea, saying it could push more than half of creditworthy borrowers out of the housing market or into applying high-stakes loans.
“A proposal by regulators to define a high-quality mortgage as one with at least a 20 per cent down payment, or possibly 10 per cent, would hobble a healthy segment of the housing market,” the CRL said. “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.”
In the study, the CRC looked at more than 19 million loans between 2000 and 2008 and what would have happened if a 20 per cent down payment and other underwriting criteria had been in place at the time.
The hardest hit group would be African-American and Latino homebuyers, who are predicted to be pushed out by 75% and 70%, respectively. Given how poorly minority borrowers fared leading up to the housing crisis, this would be a massive step backward.
The report wasn’t all bad news, however. It found new government regulations on the lending sector will work, such as the Dodd-Frank Act’s ban on loans that have the highest risk of default.
But the CRC concludes that a government-imposed minimum on down payments wouldn’t do enough to prevent defaults to justify how many homebuyers it would drive out of the market in the process.
The Federal Housing Finance Agency is already trying to tackle more than half a million empty homes left by the foreclosure crisis. If there’s a risk that this new rule could put millions of potential buyers out of the picture, chances are the agency wouldn’t be too keen on the idea.