Do we really need 20% down payments?
Requiring homebuyers to bring more cash to the table is likely to be part of mortgage reform. Is that really a good idea?
One of the measures being discussed to reform the mortgage industry is to require larger down payments from homebuyers, perhaps 20% or more.
The rationale is that with more "skin in the game," borrowers will be less likely to walk away if their homes lose value. If they need to sell, declining prices won't have eaten up all their equity.
This argument is a bit less persuasive in areas where the decline in property values has been significantly more than 20%. Of the $751 billion in negative equity nationwide, half is from borrowers who are more than 50% underwater. A buyer who put $80,000 down on a $400,000 house in 2005 would still be significantly underwater in locales where that house is worth $200,000 or less.
Some people want to go back to the "old days" when homebuyers routinely made 20% down payments, but I'm not sure when those days were. I bought my first house in 1983 with 5% down. But data from Zillow's analysis of nine hard-hit cities found that median down payments averaged 20% in the late '90s, began moving down in 2001 and were 4% or less in 2006 in those markets.
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Linda Stern and Felix Salmon, two bloggers for Reuters, did point-counterpoint posts on whether higher down payments are a good idea.
Even if you have the money for a bigger down payment, there can be good reasons to save your cash. Mortgage rates continue to skirt all-time lows: Why not put your money to work for yourself and borrow as much as you can reasonably afford, on a monthly basis, at today’s rates? You can put the money you’re not paying into a down payment to work elsewhere. If home values rise, you will have done your best to leverage a small down payment into bigger equity. If they fall, you’ll have less skin in the game, and that could put more pressure on your banker to improve your loan terms lest you walk away.
The average mortgage rate this week was 4.88%, up from 4.87% last week.
Linda’s conclusion is that “the less you put down, the better off you are.” Which is true so long as you keep on making all your mortgage payments without any problem, and nothing goes very wrong either with your personal economic situation or with the U.S. economy as a whole. That’s the way that leverage works: It makes everything sunny, so long as things go right. And then it plunges you into misery when things go wrong.
Stern then wrote a second post, saying, "Remember, my job is to write about what’s good for the consumer, not the bankers and brokers."
The Center for Responsible Lending, a consumer group, argues that low down payments have been used successfully for more than 50 years, expanding in the 1980s, and that the mortgage mess was brought about by subprime loans and weak underwriting, not low down payments. The center wrote:
In fact, low-down-payment home loans have been a significant and safe part of the mortgage finance system for decades, bearing little resemblance to subprime and other alternative mortgage products that crashed our economy. And responsible low-down-payment loans are also a key to the recovery of our nation’s housing market and economy.
The center calculated that to buy a house for $172,100, the median price in 2009, a family would have to save $250 a month for 14 years for a 20% down payment and 5% closing costs. For 10% down, the family would need to save for nine years, and for 5% down, the family would need to save for six years.
Lenders have already begun requiring higher down payments as well as higher credit scores. Plus, they've tightened underwriting.
The Federal Housing Administration, which continues to offer mortgages with down payments as low as 3.5%, made half the loans for residential purchases last year. The agency has significantly raised the fees it charges borrowers, but is likely to continue offering mortgages with lower down payments.
What do you think? Should homebuyers be required to put at least 20% down? Or would other changes in the mortgage process make more sense?
What will 20% do...keep them in their house? NOT.
I financed my home with a 60% down stroke , and am currently upside down in the value/equity ratio. Again, what will 20% do? Does it mean I need to walk away sooner?
This scam (Read 20% down stroke) and the other scams of tighter underwriting, etc. is just an excuse not to lend money in these uncertain times.
Bankers are bankers, they will not change until you force them into change by regulation, and the more regulation...the better.
About Teresa Mears
Teresa Mears is a veteran journalist who has been interested in houses since her father took her to tax auctions to carry the cash at age 10. A former editor of The Miami Herald's Home & Design section, she lives in South Florida where, in addition to writing about real estate, she publishes Miami on the Cheap to help her neighbors adjust to the loss of 60% of their property value.