As federal regulators have proposed a 20 percent down payment requirement for many borrowers to secure a home loan, let me be positive. This is a great idea — in fact it might be low — for speculators and investors purchasing residential real estate. Those in this market segment are sophisticated, willing and able to take risks. They can weather the unexpected.

Even at 20 percent down, speculators may consider walking if they purchase preconstruction homes or condominiums and cannot close before interest rates climb so high they cannot cover their monthly cash flow. The difference between them and everybody else is that they can handle the losses. They are the first in to purchase presales in a good market, and the first out when the market goes south.

But the first-time homebuyer is the bread and butter, the base, the market segment that needs the help. Nothing down is not the answer. Neither is 20 percent. And for too long they have been set to fail if things did not go as planned. Mortgage to the max, then refinance to the max, so the lender keeps making money on those fees and points.

Regulatory proposals aside, what is truly needed is an understanding of the market — especially the first-time homebuyer. First-time homebuyers, as they start moving back into the market, need a program that makes sense. They will not be able to depend on refinancing every few years. They need a sound program now.

Forget thinking out of the box. The box is too deep. Let’s focus on understanding the times, and knowing what to do. These are times that require fresh, market-sensitive thinking.

First of all, let’s make some assumptions:

1. If buyers cannot settle down with a monthly payment they can depend on (fixed mortgage), and cannot afford a high down payment, they will rent. This, in turn, will drive rents higher and higher, forcing many families to move down in their lifestyle as life’s financial, health, and family issues create their own problems. Homeownership is important.

2. In the past, lenders pushed mortgages to the qualifying limit based on two incomes. This is a formula for disaster (or refinancing, depending on how you look at it and who is looking at it).

3. Relatives need to be able to help first-time homebuyers without having to get legally involved with the home.

4. Bankers need to get back to encouraging savings, not borrowing. Borrowing will take care of itself.

5. Investors and speculators ruin the market for almost everybody, and can take risks without lifelong consequences.

6. Lenders can greatly simplify the mortgage process and can therefore reduce closing costs significantly.

7. A mortgage should be based on performance and fundamentals, not potential equity and refinancing possibilities.

Whatever the mortgage industry does, it must replace some of its muscle with heart, and offer first-time homebuyers a product that gives them a fair starting point, not one that dares them to live a mishap-free life.

The basic goal must be to develop a formula that helps both the buyer and lender stay out of trouble down the road. Buying the home is the fun part. Keeping it gets a little difficult at times. Here’s a plan that targets homebuyers, but is available to all buyers.

All buyers deserve a chance to establish a strong foothold with their finances. Assume there will be emergencies that can affect timely mortgage payments.

Here’s my own proposal for a better mortgage market:

Proposed mortgage model

1. Mortgage down payments should be set at 4 percent for all first-time buyers.

2. For couples, base the mortgage payment on their combined ability to repay, but give the second income only a 50 percent credit, if that.

3. The first-time homebuyer must place in an interest-bearing escrow an amount equal to three months of monthly payments, including taxes and insurance (or more, depending on credit score).

4. Escrow funds can be used to pay missed mortgage payments, giving the family time to recover from unemployment or emergency issues without affecting their credit or putting them or their lender under undue strain.

5. Escrow funds can come from third parties with no legal liabilities to repay the mortgage.

6. The mortgage should have a fixed rate for at least five years, with the future interest rate protection based on payment history. This gives the family time and incentive to get established.

7. At the end of the five years, the buyer has had some time to build equity, and to establish a credit history.

Example: A first-time buyer purchases a $100,000 home, with a $4,000 deposit. Let’s say the monthly payment on a $96,000 mortgage is $500 a month — $1,500 must be escrowed in an interest-bearing account, to be returned with interest at end of five years, less any funds drawn down to cover mortgage payments. In effect, the lender is asking for a $5,500 commitment.

An incentive in interest rate or down payment could be made available based on the buyer’s payment performance at the end of five years. But the first-time homebuyer has the assurance that his credit, home, and family are protected for six months should an emergency situation arise.

Can you imagine how many young families would feel more secure, how many parents and relatives could and would help, without unwanted ownership participation or co-signing? How the escrow funds are paid back would be up to the buyer and relatives.

For speculators and investors: Double down on deposits and resale restrictions for speculators.

Foreclosures would be greatly reduced, and lenders would be doing what they set out to do so many long years ago: truly service their local community in a way that doesn’t dare their mortgage customers to stay in their home when they are hit with unexpected or unavoidable circumstances.

Please share your thoughts in the comments section below.

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