2011 – it's the year of the regulators with housing and finance. A major collapse in the banking industry, along with periods of decline in housing have piqued Capitol Hill's interest in making more laws in the mortgage banking and financial industries. The first volley of the year is out. Looming mortgage lending rules have everyone sweating over an April deadline for issuing the regulations. The new rules would include requirements on the amount of cash that borrowers have to put up as a down payment for "less-risky" loans. As you can imagine, there is a lot of disagreement over what these down payment requirements should be in order to provide the right amount of equity for the lending market's comfort and still be within the average home buyer's reach.
The regulations aim to prevent future housing market meltdowns. But if not well thought out, these rules could actually contribute to a prolonged sag in the market. No one really knows for sure how this will play out, but here are a few pros and cons of setting down payment requirements that are too high, considering what could happen:
Pros: -Lenders reduce upfront risk – meaning their losses wouldn't be quite as severe should the loans go bad quickly. -Lower lending risk could lessen the number of defaults in the market. -The mortgage securities investment market could benefit from less risk – fewer defaults would make these investments more attractive. That interest opens up more liquidity in the mortgage finance market. -Borrowers start with more equity.
Cons: -The borrower's upfront costs go up. -Added buying costs could contribute to a lessening of demand in the entry-level market. -Home sellers could face lower prices to account for new affordability factors. -The housing recovery could take even longer to play out.
One unintended consequence also could be that FHA loans become more prevalent – especially for first-time buyers who don't have the added boost of previous equity. This is because FHA loans require a substantially lower down payment, sometimes as low as 3.5%.
We don't really know how these changes will affect everyone in the market, but we can expect to see some healthy debate in the coming weeks. We should all pay attention and contribute to this discussion.