Government-Mandated Down Payments would Block Creditworthy Home Buyers


Center for Responsible Lending
January 18, 2012

As federal regulators consider setting down-payment standards on new mortgages, a new study shows such rules could push 60 percent of creditworthy borrowers into high-cost loans or out of the market altogether.

A proposal by regulators to define a high-quality mortgage as one with at least a 20 percent down payment, or possibly 10 percent, would hobble a healthy segment of the housing market. While higher down payments do result in fewer defaults, the payoff is small relative to the number of creditworthy households who could be shut out of the market, the study shows. For the full study, go to www.ccc.unc.edu/QRMunderwriting or  www.responsiblelending.org/mortgage-lending/research-analysis/balancing-risk-and-access.html.

The results are particularly striking for African-American and Latino home buyers. A mandatory 20 percent down-payment requirement would exclude about 75 percent of African-American and 70 percent of Latino borrowers who could be successful homeowners from obtaining fairly priced mortgages.

The working paper, “Balancing Risk and Access: Underwriting Standards for Qualified Residential Mortgages,” was produced by the UNC Center for Community Capital and the Center for Responsible Lending. Researchers look at mortgages originated from 2000 to 2008 and what would have happened if a 20 percent down payment and other underwriting criteria had been imposed beyond those already mandated by the Dodd-Frank financial reform law. 

The study finds Dodd-Frank’s ban on loans with the highest risk of default—for example, those with prepayment penalties or no income documentation—fixes the bad underwriting that caused the housing crisis. Adding a down-payment threshold set by the federal government would do little to reduce defaults relative to the large number of creditworthy home buyers it would push from the market. These findings are particularly significant because the stalled housing market has been a key obstacle to economic recovery.

For more information:For more information, Kathleen Day at (202) 349-1871 or kathleen.day@responsiblelending.org; Ginna Green at (510) 379-5513 or ginna.green@responsiblelending.org; Roberto G. Quercia, director, UNC Center for Community Capital, quercia@email.unc.edu, (919) 843-2493.

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About the Center for Responsible Lending

The Center for Responsible Lending is a nonprofit, nonpartisan research and policy organization dedicated to protecting homeownership and family wealth by working to eliminate abusive financial practices. CRL is affiliated with Self-Help, one of the nation's largest community development financial institutions.