20 percent down on homes may soon be norm
Tuesday, April 12, 2011
20 percent down on homes may soon be norm
Aim is to prevent another crisis
By: Dina ElBoghdady and Zachary A. Goldfarb, Washington
Post
WASHINGTON - Most home buyers put down less than 20 percent when
they take out a mortgage, a sign of how hard it has become to
scrape together enough cash to purchase a house.
Prospective home buyers may soon face a rude awakening.
Seeking to avoid a repeat of the foreclosure crisis, the Obama
administration and regulators have proposed rules that are all but
certain to boost the interest rates and fees on many
low-down-payment loans. Only borrowers putting down 20 percent
could get the best deals.
To buy a house for $170,000, the median national price, the
borrower would have to come up with $34,000 in cash.
It takes the average middle-class family 14 years to save that
much money and closing costs, according to the Center for
Responsible Lending. That's a steep hurdle, though 20 percent down
was a common standard for most of an earlier generation.
Even with help from her parents, Julia Ziegler, 29, a social
media specialist, would have to put down less than 20 percent on
the $250,000 condominium she wants to buy in Washington.
"Coming up with $25,000 plus closing costs is tough, and I'm
buying in the lower end of the market,'' Ziegler said. "If I had to
put down 20 percent, if I needed $50,000, forget it. I would have
to save for a long, long time.''
The federal proposal's impact would extend beyond first-timers
such as Ziegler to repeat buyers, who generally have counted on
equity built up in one house to provide the down payment for the
next.
Consumer activists and housing industry executives warn that the
proposed rules would make homeownership much harder to achieve,
particularly for first-time buyers and minorities, who have relied
in great numbers on low-down-payment loans.
"Renters, by and large, have very little cash on hand, and
minority renters have even less,'' said Barry Zigas, housing policy
director at the Consumer Federation of America. "Raising
down-payment barriers to a level that history tells us is neither
necessary nor appropriate will foreclose homeownership
opportunities for millions of families.''
In a recent report to Congress on the future of housing finance,
the Obama administration said it was still committed to ensuring
that Americans of modest means can buy houses. Although officials
say they support some form of down payment assistance, they have
yet to offer many specifics.
Before the Great Depression, home buyers were often required to
put down 50 percent or more. But after the Depression and World War
II, the government sought to stimulate the housing market and make
it easy for veterans - and later all Americans - to buy houses by
dramatically lowering down-payment requirements. Buyers could put
down 5 percent or less on loans offered through the Federal Housing
Administration or other government agencies.
The nation's homeownership rate soared, from 43.6 percent in
1940 to 64 percent in 1980, where it stayed for many
years.
"America was transformed from a nation of urban renters to
suburban homeowners,'' Richard Green of the University of Southern
California and Susan Wachter of the University of Pennsylvania
wrote in a study of the history of the American mortgage.
About 1980, the norm for down payments settled at 20 percent,
but low-down-payment loans continued to be available for borrowers
who met relatively strict criteria.
As home prices soared at the start of the last decade, banks
began to offer a new breed of low-down-payment - or no-down-payment
- loans to a far wider range of borrowers, including many who were
poor credit risks. Those mortgages were often linked to other risky
lending practices, which contributed to the housing crisis.
"If people had put 20 percent down in 2005, if the law required
it, the crisis would have been a lot milder than it turned out to
be,'' said Paul Willen, a senior economist at the Federal Reserve
Bank of Boston.
Government officials now see raising down payments as a way to
curtail shoddy and dishonest lending and to limit foreclosures if
home prices decline. Under the standards proposed last month, a
mortgage with a 20 percent down payment is deemed safe. In the case
of mortgages with smaller down payments, banks would have to hold a
stake in those loans rather than sell them off, a costly
requirement that banks say would be passed on to borrowers in the
form of higher interest rates and fees.
How high? Industry estimates range from a quarter of a
percentage point to 2 percentage points.
Some low-down-payment loans would still be available without the
higher rates and fees through federal programs such as those
offered by Fannie Mae, Freddie Mac, and the FHA. But the
administration has said it wants to eliminate Fannie and Freddie
eventually and to shrink the FHA's role. Any changes could take
several years before the impact is fully felt.
Even federal officials proposing the standard acknowledge that
many creditworthy borrowers would have trouble coming up with 20
percent. In seeking public comment, regulators asked whether the
level should be set at 10 percent, instead.
Note: This version of the story appeared in The
Boston Globe