Last week the Obama administration called for lenders to raise down payments on properties to a minimum of 10 percent on conventional loans, but that number is likely going to be on the low end of the spectrum. In fact, private lenders are already pushing the numbers higher in an effort to mitigate risk as home prices fall, reported the Wall Street Journal yesterday[1]. In fact, over the course of 2010 before there was any official stance from the administration on the issue, the median down payment rose to 22 percent on “properties purchased through conventional mortgages.” A conventional loan is one that can be “bought or guaranteed by government-controlled Fannie Mae and Freddie Mac.
And this rise in payments is likely just the beginning, since most plans to phase out or phase down Fannie and Freddie include raising different types of rates, including down payments, to encourage more private participation in the housing market. It is likely that whatever Fannie and Freddie’s minimum down payment ends up being, other lenders will impose additional guidelines (and likely up the down payment) on top of this[2]. Ultimately, this might not be a bad thing. Lending as we knew it in the early 2000’s is over, and given how many people got mortgages who could never hope to pay them the end of that era is not the worst thing to happen to housing – though the fallout is certainly painful. Higher down payments will compel would-be homebuyers – investors and otherwise – to either plan more carefully for their purchases or invest via creative financing methods. Properly conducted, either avenue could help eventually clear the foreclosure glut and move the housing market forward.
According to the Obama administrations report on housing last week, “Reforming America’s Housing Finance Market,” the ultimate goal of housing reform will be to “wind down” Fannie and Freddie, thereby completely changing the face of the “conventional loan” and housing finance as we have known it for the past four decades. Do you think that these changes, including larger down payments, are a good thing? Will it impact your personal real estate investing strategy?
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[1] http://online.wsj.com/article/SB10001424052748703312904576146532935600542.html
[2] http://www.homebuyinginstitute.com/news/mortgage-down-payment-145/
