Down payment rule could crush housing market

Red jigsaw puzzle piece shaped like a house

Could you afford a $37,540 down payment on a house?

My wife and I certainly couldn't when we bought our first home.

But that's what it takes to put down 20% today on a median-priced home in our community.

Proposed rules could make such a down payment mandatory for most buyers (so long, private mortgage insurance) in order to win the top mortgage rates.

A new study says that mandate would push six in 10 creditworthy borrowers into higher-cost home loans -- or prevent them from buying a house altogether.

This is not a prescription to fix the ailing housing market.

But that's precisely what's on the table as regulators work to implement new mortgage-lending rules under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

Now, there's much to like in Dodd-Frank when it comes to protecting us from many of the abusive lending practices that helped fuel the housing bubble and subsequent crash.

Proposed standards would "restrict the origination of loans with features associated with higher default rates," according to research by the Center for Responsible Lending and the University of North Carolina's Center for Community Capital.

Such features include interest-only and negative-amortizing loans or mortgages that require balloon payments.

These types of home loans were practically designed to blow up. Keeping irresponsible products from the marketplace is good.

The Center for Responsible Lending study found that outlawing the risky lending practices at the center of the subprime boom would on their own "lead to substantially lower foreclosure rates."

But the agencies responsible for implementing Dodd-Frank also are considering new rule on upfront payments to make default even less likely.

The study said implementing a mandatory rule requiring 20% down would lead to even lower default rates, but at a price: Most people would be ineligible for today's record-low mortgage rates.

African-American and Latino home buyers would be particularly hard hit. The report notes that 75% of otherwise qualified African-American borrowers and 70% of Latino borrowers wouldn't be able to come up with the required down payment.

Dean Baker, co-director for the Center for Economic and Policy Research, told the Huffington Post this is no big deal.

"I know of almost no planet where a slight increase in the cost of getting a mortgage will shut out 60% of creditworthy borrowers," he said.

But are we really talking about a "slight increase" here?

The Center for Responsible Lending says the loans available to people who can't afford to put 20% down would be three-quarters of a percentage point to 4 percentage points higher than the lowest rates on 30-year, fixed-rate home loans.

That can make a lot more than a slight difference in monthly payments.

Let's assume you could make that kind of payment and qualify for the best mortgage rates.

The cheapest 30-year, fixed-rate loan I found in my town charges a remarkable 3.625% with no points.

The median home price home in my community is $187,700, which means my monthly mortgage payment would be $684.

Cut the money down in half and bump the mortgage rate up by just three-quarters of a point, and you're going to be writing a check for $843, or an additional $159, every month.

Bump the rate up by 2 percentage points, and you're paying about $300 more.

Add the full 4 points to the rate, and the payment balloons to $1,196 a month, an increase of more than $500.

I don't think any of those qualify as a "slight increase."

On this planet, anyway, it might have prevented my wife and me from buying a home.

It's a rule regulators need to reconsider. Urgently.

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