Buying a house? Think 20% down

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Buying a house? Think 20% down

Article by: ZACHARY A. GOLDFARB , Washington Post
Updated: March 29, 2011 - 11:36 PM

Federal regulators propose rules that would require higher down payments in order to get the best rates from banks.

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In this March 16, 2011 photo, a sold sign hangs on a house in Albany, N.Y. Fewer Americans bought previously occupied homes in February, pushing the median home price down to its lowest level in nearly 9 years.

Photo: Mike Groll, Associated Press - Ap

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WASHINGTON - If you want to buy a $300,000 house, you'll need $60,000 as a down payment to get the best interest rate on your home loan, according to a proposal released Tuesday by federal regulators.

A group of federal agencies announced a high standard for home buyers to get the best mortgage rates: Only those who can make a 20 percent down payment and have not had problems paying mortgages in the recent past would be eligible.

The regulators are trying to prevent the kinds of practices that dumped so many risky mortgages into the financial system several years ago.

But the proposal has sparked concerns from some groups that a 20 percent down payment is too onerous for many working-class borrowers. Banks also oppose the heightened down-payment requirement, which regulators had considered setting at 10 percent.

The proposal, which could be made official this summer, is unlikely to make a major difference in the market for a while, because most home loans are insured by federal agencies using taxpayer dollars. Those mortgages would be exempt from the proposed requirements.

The regulatory effort comes as the Obama administration and House Republicans have made proposals to begin winding down Fannie Mae and Freddie Mac, the government-backed mortgage giants, in part by reducing the competitive advantages they have over banks. The aim would be to draw private firms back into the mortgage market, which they exited during the financial crisis.

In the years leading up to the crisis, lenders would hand off loans -- many of them high-risk -- to other companies for a fee. Without skin in the game, they could then turn around and make even more risky loans.

Officials say the new rules would correct that.

"Properly aligned economic incentives are the best check against lax underwriting," said Sheila Bair, chairman of the Federal Deposit Insurance Corp., as she announced the beginning of a public comment period on the rules.

The new standard was proposed by the FDIC and the Federal Reserve. Other regulators are expected to follow suit.

The rule, known as "risk retention," would require that mortgage lenders invest in the loans they make, so if the loans go bad, the lender would suffer. Lenders would have to accept 5 percent of the losses.

But banks would not have to retain any risk for mortgages made to borrowers who put down at least 20 percent, making the loans relatively safer. As a result, the cost to the banks would be less, and they would be able to offer lower interest rates for these loans.