Going Down the Wrong Mortgage Road
By David Reilly
Bank Regulators Backtracked on a Key Provision Tied to Mortgages and Down Payments While They Should Take a Longer-Term View. So much for skin in the game. No- or low-money-down mortgages helped fuel the housing bubble and subsequent crash. Following the crisis, there were understandable calls for a return to more prudent practices, where borrowers would be required to make some sort of down payment for a mortgage, typically equal to 20% or 10% of a loan’s value. As part of that push, bank regulators included a 20% down-payment requirement in proposed rules that would determine whether banks had to retain for a period of time mortgages that they planned to package and sell on to investors. On Wednesday, regulators backtracked in the face of stiff opposition from the real-estate industry, members of Congress and many banks. In an unusual revision to their original proposal, the regulators dropped the down-payment requirement. The argument against this measure revolves around credit availability. All this potentially sets the stage for some sort of compromise that would see a 10% down-payment requirement, notes Karen Shaw Petrou, of research firm Federal Financial Analytics. Failing that, regulators may once again be putting hopes for short-term economic gain ahead of the need to build a safer housing market.