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CRL to Feds: Don't Mandate Large Home Down Payments

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Low Down Payment Loans Seen as Key to Housing and Economic Recovery

By Charlene Crowell, NNPA Columnist –

As Congress and the White House continue to deliberate how best to rescue the nation’s ailing housing market, some in Washington are calling for a requirement that prospective homeowners make higher down payments in the range of 10-20 percent.

Yet according to the Center for Responsible Lending (CRL), requiring proper underwriting and verification of income, rather than a high down payment, are the factors that ultimately determine the success of a home loan. In a recently-released issue brief CRL also notes that requiring such a high down payment would take 14 years for the typical American family to save enough money for a 20 percent down payment and additionally stop a 50-year practice of allowing low down payments. Additionally, it could possibly remove the current option of purchasing private mortgage insurance.

Drawing a clear difference between low down payments on mortgages and subprime mortgage loans, CRL also warns that limiting low down payment loans will close the gateway to homeownership and the opportunity for middle class families to build wealth. Among households earning $20,000-$50,000, those who own homes have 19 times the wealth of those who rent.

“Because of low down payment loans”, the brief advises, “millions of low-to-moderate income families became successful homeowners. Mortgages generally performed well, producing limited losses for lenders, investors and taxpayers, while expanding the middle class.”

Between 1990 and 2009, more than 27 million mortgages were made with low down payments. These loans did NOT carry the risky features found in subprime loans. Excluding FHA and VA loans, these loans represented 13 percent of total mortgage originations during this period. These types of loans also were achieved by proven industry practices that included fixed-rate loans or at least the same initial mortgage payment for seven years, income and asset documentation, property appraisals, a debt allowance of no more than 41 percent of annual income, and an assessment of a borrower’s ability to repay the loan.

By contrast, subprime loan terms with weak underwriting standards brought variable interest rates after the first two years of the loan and every six month thereafter. Additionally, subprime loans had little if any income documentation and did not evaluate a borrower’s ability to repay the loan, even while allowing debt as high as 80 percent of annual income. These and other contributing factors resulted in record default rates.

The call for full privatization of the housing market is also being criticized by a number of civil rights and progressive organizations that include: the NAACP, the National Council of LaRaza, PolicyLink, the National Urban League, the Kirwin Institute, and National People’s Action.

On February 11, these organizations and CRL issued a joint statement on reforming the U.S. housing market that said in part, “Full privatization would leave most Americans at the mercy of Wall Street and we know from experience the devastating results that would bring. . .True reform must eliminate the dual-track structure that traps qualified families in a fringe credit market and must build a more secure and accountable secondary market, preventing future crises -- like the one that helped bring our economy to its knees.”

The complete issue brief is available on the CRL web at: http://www.responsiblelending.org/mortgage-lending/policy-legislation/regulators/dont-mandate-large-down-payments.html

Charlene Crowell is the Center for Responsible Lending’s communications manager for state policy and outreach. She can be reached at: Charlene.crowell@responsiblelending.org.

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