House Hears Debate Over 20% Down Only for Home Purchases

U.S. regulators “must be mindful of the trade-off” between borrower equity and access to credit as they consider new rules for mortgage risk-retention, Acting Federal Housing Administration Commissioner Bob Ryan said.

Higher down payments won’t necessarily reduce default risk and could keep creditworthy consumers from buying homes, Ryan said at a House Financial Services subcommittee hearing on mortgage risk retention. “This definition has the potential to create false- positive situations,” Ryan told lawmakers.

The Financial Services capital markets panel is reviewing a proposal calling on homebuyers to have a 20 percent down payment and unblemished credit to qualify for so-called qualified residential mortgages that would be exempt from regulations requiring lenders and securitizers to retain a stake.

The Department of Housing and Urban Development, FHA’s parent, and five other federal agencies are seeking comment on a rule mandated by the Dodd-Frank Act that would require lenders and securitizers to keep a 5 percent stake in loans they sell.

Lawmakers crafted the risk-retention rule with the stated goal of discouraging the originate-to-sell incentives that led to a flood of poorly underwritten subprime loans before the 2008 financial crisis. The measure could affect all asset-backed securities, including bonds backed by credit-card balances, auto loans, commercial real estate and student debt.

Many factors can predict loan performance, Ryan said, pointing to his agency’s track record. FHA-insured loans with a 5 percent down payment from borrowers with poor credit perform “significantly worse” than low down-payment loans to those with better credit, he said.

Broad Opposition
The mortgage exemption as written is opposed by a broad coalition of affordable-housing advocates, consumer watchdogs, real estate agents, banks and home builders. The groups say the plan would unfairly restrict credit and put homeownership out of reach for responsible borrowers. They want regulators to shrink the size of the down payment.

“Well-underwritten low down payment home loans have been a significant and safe part of the mortgage finance system for decades,” the coalition said in a study criticizing the draft rule. Rather than discouraging bad lending, the proposal “penalizes qualified, low-risk borrowers.”