Should a 20% mortgage down payment be standard?

Key U.S. financial regulators have agreed to require a minimum 20% down payment on home mortgages that would be exempt from so-called risk-retention standards for banks, according to two reports Tuesday.

The upshot is that home buyers with less than that much to put down could face higher borrowing costs, or could be priced out of the market altogether.

CNBC’s Diana Olick reported that the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. have agreed on a 20% down payment rule for a “qualified residential mortgage.”

The Federal Reserve also backs the 20%-down idea, the Wall Street Journal reported.

The Dodd-Frank financial overhaul law of 2010 requires regulators to differentiate between qualified and non-qualified mortgages. A non-qualified mortgage would be deemed lower-quality, and a lender making such a loan would have to retain 5% ownership if the loan is packaged and sold to investors.

The 5% risk-retention rule would be waived for qualified mortgages.

The idea behind the 5% ownership requirement is to get banks to be more careful about their lending standards. During the housing boom banks knew they could sell high-risk mortgages to investors with impunity, because the banks weren’t on the hook for any future losses on those loans.

But the 5% risk-retention rule would raise banks’ costs by requiring them to set aside more capital on their books to back the loans. That, in turn, could force up the price of non-qualified mortgages to borrowers, or discourage lenders from making non-qualified loans.

Some in Congress says a 20% down payment requirement is excessive. That includes Sen. Johnny Isakson (R-Ga.), one of the authors of the qualified-mortgage provision in the Dodd-Frank law.

In an op-ed piece on The Hill blog this month, Isakson wrote that a large down payment “is not what we intended” with the provision, and would unfairly penalize "responsible" borrowers.

From Isakson:

An analysis of loan performance over the past decade proves that low down-payment homebuyers, when properly underwritten, have a relatively low risk of default when compared to the high-risk products and underwriting standards that led to the market meltdown. Simply put, a large down payment is not the most effective gauge of whether or not the borrower will pay their mortgage. This is precisely why prudent underwriting was at the center of our amendment.

What's more, he said that Dodd-Frank "outlined a framework that specifically ensured the inclusion of low down-payment loans in the qualified residential mortgage, provided they have mortgage insurance or other credit enhancements."

Regulators are supposed to agree on the new loan standards by late April.

-- Tom Petruno

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