Full underwriting and reasonable debt-to-income ratios are a better way to "get back to basics" in mortgage lending than requiring homeowners to make down payments of 10 to 20 percent, the Center for Responsible Lending argues in a policy brief.

The Obama administration’s proposal to shrink Fannie Mae and Freddie Mac’s role in mortgage markets calls for higher down payment minimums heading toward 10 percent. Lawmakers are drawing up their own plans that could be even more drastic.

While the Federal Housing Administration’s 3.5 percent minimum down payment requirements remain in effect for now, underwriting standards have been tightened and premiums raised in an effort to reduce FHA’s market share. Some lawmakers advocate raising FHA down payment minimums to 5 percent.

Mandating larger down payments would harm the economy, housing markets and middle class families, Center for Responsible Lending lobbyist Susanna Montezemolo argues in a policy brief.

Low down payments have been a "significant and safe part of the mortgage finance system for decades," Montezemolo says, with more than 27 million mortgages taken out between 1990 and 2009 with down payments of less than 20 percent.

That number — which excludes FHA and VA loans — represents nearly a quarter of loans purchased by Fannie Mae and Freddie Mac during that period, and 13 percent of all mortgage originations.

Those loans generally performed well, producing limited losses for lenders, investors and taxpayers, while expanding the middle class, Montezemolo maintains. It was risky loan terms and weak underwriting standards that drove record defaults in subprime lending, she argues.

If homebuyers are required to put 10 to 20 percent down when they take out a mortgage, that will shrink the pool of eligible homebuyers a lot, with only marginal improvements in loan performance, Montezemolo writes.

Crunching the numbers, she figures it will take a family that saves $3,000 a year 14 years to save up enough for a 20 percent down payment on a $172,100 home. That’s a savings rate of 7.5 percent a year for an average middle class family with about $50,000 in annaul income — well above the current 5.8 percent savings rate for U.S. households.

Homeownership "remains a key driver of personal and national economic prosperity, and will be fostered by responsible low down payment loans," Montezemolo concludes. She suggests mortgage loan performance will improve under new origination standards in the Dodd–Frank Wall Street Reform and Consumer Protection Act, without having to raise down payment requirements.

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