Picture a real estate market where conventional mortgage financing is divided into just two, unequal segments. I am not making this up:
- "Grade A" loans that get the best rates available but require a minimum 30 percent down payment. Since most homebuyers don’t have that sort of cash sitting around, there aren’t large numbers of new mortgages in this category. It’s pretty much reserved for the credit elite — refinancers who’ve built up substantial equity and upper-income savers looking to buy a house.
- "Grade B" loans are for everybody else. They come with 2 to 3 percent higher interest rates than Grade A, but allow smaller down payments. Because of the steeper interest charges and tough underwriting requirements, these loans also represent a challenge for many homebuyers. At the lower credit score ranges — and for just about any buyers with nontraditional or complicated credit — lenders avoid them altogether.
Sound like a smart way to run a housing recovery? You’ve got to be kidding. Yet something like this bizarre concept could actually emerge within the month from federal regulators’ ongoing closed-door deliberations to meet a key mandate of last year’s Dodd-Frank financial reform legislation.