20% mortgage downpayment requirement

Submitted by David from CA - 11/18/2011 - 11:25am

I heard that the law that would require a 20% down payment for all mortgages was going to take affect in April. Does anybody know if this is true?

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Comments

Submitted by Michelle - 11/21/2011 - 12:07pm

HI David,
We have heard a lot of discussion surrounding this but I have not heard that this will be implemented as a requirement.
The sad truth is that down payments are NOT the issue. Our legislators believe that requiring someone to have "skin in the game" would prevent future foreclosures. They mistakenly believe that it was the 100% financing that cause the housing bubble. The real truth is that in many areas rents are exceeding the monthly payments on a 30 year loan now that prices have "corrected" and interest rates are low. This means that if the banks returned to 100% financing even on folks with marginal credit there would be a very low chance that they would default given that their house payment would be lower than their rent payment. Even if they did fail to pay and the lender had to foreclose they would be in excellent position to recover the amount of the loan through a foreclosure because the house was NOT over valued. The bigger issue is how much is a house really worth!
The faulty down payment argument also fails to take into account all of the homeowners that put down hundreds of thousand of dollars and because of the massive credit bubble have not only lost their investment but cannot afford to keep the home. Many end up in foreclosure because they cannot refi to today's low interest rate.

Submitted by David - 11/21/2011 - 12:27pm

Hi Michelle,

Thank you for the response. I completely agree that having "skin in the game" wont make a difference. Look at all the banks that went under, they had plenty of skin in the game, but couldn't see past the executives personal interest for large bonus over long term profitability.

It's hard to write legislation that says mortgages can't be for more than a house is "worth", as worth has a lot to do with what somebody is willing to pay, and if you have a buyer then that is what it is worth.

I would be more interested in legislation that limits the size of a loan to what a person can afford to pay.

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