Balancing Risk and Access: Underwriting Standards for Qualified Residential Mortgages


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Published: January 18, 2012

As federal regulators consider setting down-payment standards on new mortgages, this research shows such rules could push 60% 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 10% or 20% down payment 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 results are particularly striking for African-American and Latino home buyers. A mandatory 20% down-payment requirement would exclude about 75% of African-American and 70% of Latino borrowers who could be successful homeowners from obtaining fairly priced mortgages.

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—addresses 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.

“Balancing Risk and Access: Underwriting Standards for Qualified Residential Mortgages,” was produced jointly by the UNC Center for Community Capital and the Center for Responsible Lending.