You may need 20% down to buy a home

Federal regulators have proposed changes aimed at boosting the number of mortgages with a 20 percent down payment, a move that could price out many lower-income and first-time buyers.

The Dodd-Frank Wall Street Reform and Consumer Protection Act, enacted last year to prevent another financial meltdown, requires financial institutions to have "skin in the game" by holding in reserve 5 percent of each loan they sell to investors -- unless the loan is a "qualified" home mortgage.

Regulators, tasked with defining "qualified," have proposed 20 percent down payment on home purchases, leading to a big battle in the lending world, pitting lenders against regulators.

Federal regulators said the 20-percent down would reduce default rates and "restore sound practices" in lending.

For decades before the real estate boom started in 2003, 20 percent down was seen as normal.

But banks, consumer groups and other critics argue that people would now have to save for "decades" or pay higher fees or interest rates to borrow. They say down payment sizes did not start the crisis, but restrictions would stunt the recovery.

"It's a knee-jerk reaction to what's not the problem," said Lawrence P. Finn III, whose family owns Northport-based Coach Realtors.

Sheila Bair, head of the Federal Deposit Insurance Corp. and a vocal supporter of the proposed rule, said data show default rates jumping noticeably as soon as down payment falls below 20 percent.

The proposed definition of "qualified" also calls for mortgage payments not to exceed 28 percent of monthly income and total monthly debt -- credit cards, etc. -- to be no more than 36 percent of monthly income. This is close to what had been an standard before the boom.

The changes would raise borrowing costs about a tenth of a percent, federal officials said.

"This market needs strong rules that assure investors that the process is not rigged against them," Bair told the FDIC board earlier this year.

Regulators, who can incorporate feedback into the proposal, will issue a rule after the public comment period ends Aug. 1. 

Concerns, compromises
There's no consensus on what regulators will do and whether lenders would lean toward requiring 5 percent reserves or 20 percent down. Critics said regulators have taken concerns seriously and may compromise.

About 62 percent of home purchase loans on Long Island did not have a 20 percent down payment during the past two years, said Lender Processing Services, a Florida-based data provider. The Mortgage Bankers Association said the criteria would have disqualified more than 80 percent of loans made during 1997-2009 and insured by government mortgage giants Fannie Mae and Freddie Mac.

The return of 20-percent down is a real possibility, said Lawrence White, a New York University economics professor.

"It's symbolic, and it harks back to the safe and sound," he said. "If there really are a lot more safe borrowers out there, the markets will figure out a way to make it happen."

Central Islip renter Gerardo Salinas, 35, does not want to wait until he can put down $50,000 on the $250,000 house he has picked out. "When would that be?" said Salinas, who owns a landscaping service. Saving so much would take him no less than 10 years, he said. 

'Terrible' timing
Because first-time buyers often have less income, many would be held back from home ownership, said Marianne Garvin, head of the nonprofit Community Development Corp. of Long Island.

Mortgage trade groups want more flexibility in the rule, not hard figures on debt-income ratios and other criteria.

Mike McHugh, a Melville-based board member of the Community Mortgage Lenders of America, called the proposal's timing "terrible" because the economy is still weak.

Big banks, steeped in capital, would survive, McHugh said, but he's not so sure about small banks and lenders.

"Right now we don't need to lose a potential buyer," he said.