Mar 15, 2011 5:03 PM GMT
There are those on both the right and left who have pointed out the foolishness of promoting home ownership through US tax policy, legislation and subsidies. At the very least the financial subprime crisis would not have been so bad if it would have happened at all. I don't believe in artificial limits but I also don't think that banks should be protected from losses.
Most banks want to securitize loans made to borrowers buying homes with little money down. Did we learn nothing from the financial crisis?
In an attempt to fix some of the problems that caused the housing bubble and financial crisis, banking regulators are coming up with new mortgage lending rules that will address what lower-risk quality mortgages should look like. The goal is to let lenders sell so-called "qualified residential mortgages" to investors without having to retain the risks.
The question the Treasury Department must now answer is what makes a qualified mortgage? Regulators including the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency are pushing for a 20% down payment on such loans. While the big banks like Bank of America (BAC) and JP Morgan Chase (JPM) have not formally weighed in, their lobbyists at American Bankers Association and the Mortgage Bankers Association say that requirement is far too high and would price many buyers out of the housing market.
The debate will have broad implications for how homebuyers finance their mortgages. During the housing boom, many Americans took out home loans with little to no money down. When prices fell steeply following their mid-2006 peak, many borrowers didn't have enough equity to cushion the blow, leading to record foreclosures nationwide. Meanwhile, the big banks and investors holding these risky loans suffered huge losses.
Joseph Pigg, vice president and senior council of the ABA, says the 20% proposal is much too narrow and he worries it could further hamper demand for homes, especially when the fragile real estate market is still recovering. And while a heftier down payment generally reduces the risks of a loan, he says, other factors such as income, credit score, the property's location and other factors determine the quality of a loan.
But perhaps it's time to question whether homeownership should even be part of the American Dream. Tighter mortgage lending rules could return the housing market to the way it was in the 1970s, when homeownership was much lower and virtually all homebuyers put down at least 20% of the value of the house. Standards began changing around the 1980s as home prices appreciated significantly and mortgage financing became more sophisticated.
It's easy to see why bankers would gripe about the 20% minimum. Smaller loans translate into smaller profits. And lenders can fully securitize only qualified mortgages -- any loans made without the designated down payment can still be sold, but the lenders would have to retain 5% of their value on their books.