Why not require borrowers put down 100% toward a mortgage?

An article in The Hill’s On the Money section describes an alliance of sorts between lenders and consumer advocates who are expressing concerns about the negative impact stricter down payment rules would have on middle and low income borrowers seeking to buy homes.

I think down payment rules need to be stricter. If banks have to capitalize; back up their loans with hard assets, borrowers should back up the mortgage notes they issue with hard assets. The down payment should be 100% of the loan value or 20% of the loan value plus an insurance policy of some kind that provides for payment of the principal should the borrower default. That would speed up the foreclosure process and get the property into the hands of new buyers faster.

In addition, what hurt us Americans during the so called Great Recession was a lack of a diversified basket of capital through which we could have weathered the storm.  With Americans holding most our wealth in one basket, a house, we may be setting ourselves up for a financial crisis reboot, especially where that one basket generates no income and still faces a glut of foreclosures that hold down the values of houses.  Promoting less restrictive rules on down payments only lays out a welcome mat to more self-imposed financial abuse.

Share your thoughts.  Should down payment requirements be stricter?

About Alton Drew

Alton Drew brings a straight forward and insightful brand of political market intelligence. Alton Drew graduated from the Florida State University with a Bachelor of Science in economics and political science (1984); a Master of Public Administration (1993); and a Juris Doctor (1999). You can also follow Alton Drew on Twitter @altondrew.
This entry was posted in banks, capital, consumer welfare, Economy, Financial Regulation, Foreclosures, free markets, Political Economy and tagged , , , . Bookmark the permalink.

One Response to Why not require borrowers put down 100% toward a mortgage?

  1. Kenneth Ciszewski says:

    At one time there was Private Mortgage Insurance (PMI), that some lenders required from home mortgage borrowers who put down less than 20%. Every body hated it, especially when the borrower’s equity became greater than 20% of the mortgage, and the PMI insurers refused to allow the PMI to be cancelled. It was a nice cash cow for them. Realtors started helping borrowers get around it by encouraging them to get a home equity loans, for say, 10%, and had them put down 10% cash.

    I agree that we have put too much of our wealth in the housing “basket”. This was greatly encouraged by builders, lenders, title companies and realtors, who all stood to profit. Too many Americans bought the idea that a home is an “investment”, even though, if you look at the real cost basis including interest, taxes, and insurance, the ROI is terribly low. To add to the problem, builders weren’t building affordable housing, they were building “mansions”, metaphorically speaking, and promoting these as affordable, along with lenders. Too many buyers couldn’t do the math and didn’t understand the costs. Some were simply led into mortgages they really couldn’t afford.

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