Larger down payments aren’t the answerby Tim Manni
“While there is no question that larger down payments correlate with better loan performance, down payments only tell part of the story”
-Acting FHA Commissioner, Bob Ryan
Insufficient down payments were called out as one of the many culprits behind the recent housing market collapse. Now with the qualified residential mortgage definition open for comment, down payment requirements for home loans are again a hot topic of discussion.
Federal regulators have proposed setting a 20 percent down payment requirement for QRMs. While discussion is certainly underway of whether a 20 percent down payment is needed or overstated, folks in the industry are frankly scared of what a 20-percent requirement could do to an already-fragile housing market.
This brings us to the existing-home sales numbers released by the National Association of Realtors today. According to the latest figures, home prices are down in every sector of the country, mortgage rates remain exceptionally low, and “monthly mortgage payments as a percent of income have been at record lows,” said Lawrence Yun, NAR chief economist.
If prices are this cheap and rates this low, why aren’t more Americans buying homes? (March’s existing-home sales are up from a dismal February, but still lower than last year.)
These days there’s certainly more than one answer to that question – strict lending requirements, slow economy, buyer skepticism, market reforms, etc. Yet, now just imagine the increase restriction on borrowing if a 20 percent down payment became mandatory.
As we discussed yesterday, a sufficient down payment should only be part of the qualification standards. As Acting FHA Commission Bob Ryan said, “Down payments only tell part of the story:”
Working from FHA loan guidelines and experience, Ryan explained that the need for a high down payment can be off-set with a solid credit rating:
FHA uses both downpayment and FICO scores to allocate credit assistance, which, together, we have found to be a much better predictor of loan performance than just one of those components alone. For instance, FHA insured loans with LTV above 95% and a FICO score above 580 perform better than loans with LTV below 95% and a FICO score below 580, while loans with a LTV above 95% and a FICO score below 580 perform significantly worse than all other groups, as illustrated below.
The Realtors back up Ryan’s sentiments, especially as it applies to federal loans with low down payment requirements:
“Given that FHA and VA government-backed loan programs turned a modest profit over to the U.S. Treasury last year, and have never required a taxpayer bailout, we believe low-downpayment loans should continue to be available for those consumers who have demonstrated financial responsibility and are willing to stay well within their budget. Raising the downpayment requirement would unnecessarily deny credit to many worthy middle-class families and veterans,” Yun said.
READERS: What are your opinions? Does the market need a high down payment requirement to ensure we’re making safe home loans? Leave us a comment below.