Homeownership For Millennials In Doubt

Progressives have had a lot to cheer with the reforms put in place by the Dodd-Frank financial overhaul, but one reform could prevent many recent college graduates from being able to buy their own home.

As a result of the legislation, banks may begin cracking down on risky lending practices by requiring a minimum down payment of 10 or 20 percent to get a mortgage. Although the intent of the requirement was to reduce risky lending and prevent a financial crisis like the one that occurred in 2007, these reforms would prevent 47 percent of Americans from getting a mortgage, cripple the housing market, and stunt the growth of the economy.

The proposal, which has yet to take effect, encourages banks to give out ‘qualified residential mortgages’ (QRMs) that comply with certain federal regulations. The reason why this reform hasn't been implemented yet is that federal regulators are still hammering out the regulations associated with QRMs—like the 10 or 20 percent down payment rule.

If approved, the rule would affect many smaller community banks that operate with small margins, preventing them from giving out mortgages that do not qualify as QRMs.

"If the rule requires a minimum down payment of 20 percent, much of the first-time buyer market outside of FHA [Federal Housing Administration] would simply disappear," said National Association of Realtors Real Estate Services Director Ken Terpeta.

Minimum down payments would fundamentally change the American Dream for recent college graduates.

And with poor job prospects and rising student debt, even a 10 percent minimum down payment would make home ownership nearly impossible for recent college graduates. The Center for Responsible Lending estimates that if regulators mandate a 10 percent down payment, “it [will] take a household with median income 21 years to save enough to cover the down payment and closing costs [on a median value home].”

The result is that the average college graduate who completes school this year will not be able to get a typical mortgage until 2033. That wait gets longer if you factor in that two-thirds of graduates leave school with more than $25,000 in student debt stitched to their bachelor’s degrees. If the minimum down payment is bumped to 20 percent, that wait would be even longer.

As federal regulators continue to draft the QRM rule, they must consider the serious impact of over-regulation. Instead of a 10 percent minimum down payment, less intrusive regulations could be put in place while still accomplishing the goal of risk reduction, such as a 3 percent minimum down payment, or a minimum credit score.

A National Community Reinvestment Coalition analysis showed that loans originating in 2006, on the precipice of the crisis, faced a foreclosure rate of 2.26 percent in 2008, when the crisis was in full swing. At the same time, loans with a down payment of 3 percent or more had only a 0.26 foreclosure rate, and loans that were given to borrowers with a credit score of at least 620, regardless of down payment, had a foreclosure rate of 0.52.

Either a minimum down payment requirement of 3 percent or a minimum credit score requirement of 620 would successfully reduce foreclosure rates to an acceptable level, while still allowing average Americans and recent college graduates to join the market and get a mortgage.

The mortgage finance system will significantly benefit from new underwriting rules, but gratuitously punishing consumers will neither help the mortgage finance system, nor the economic recovery. Consumer advocates and banking advocates are uniting to oppose the exorbitant, exploitatively high down payment requirements.

Students and young Americans should continue to push for a lower down payment requirement.

Paul Esker and Sam Hughes are economics interns with the Center for American Progress.

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