Southwest Michigan Realtor

By Michael Delaware, REALTOR®

Raising the Stakes to Reduce Whose Risk?


Some creditworthy borrowers may not be able to obtain mortgages, if Wells Fargo & Co. gets its way. The nation’s largest mortgage lender is asking U.S. regulators to set a down payment standard of 30 percent for loans that would be exempt from a risk-retention requirement. Banks would have to retain 5 percent of any loans with down payments of less than 30 percent if those loans are securitized.

Raising the down payment requirements will limit the number of those that can purchase a home.

To put this in perspective, a 20 percent down payment on a $300,000 home is $60,000. At a level of 30 percent, a borrower would need to produce $90,000. Banks could still make loans to borrowers with less than 30 percent down, but borrowers with lower down payments would ultimately receive higher interest rates for loans that would be perceived as more risky.

This kind of strategy, although might be a lesser risk for larger mortgage companies like Wells Fargo & Co, Bank of America and Chase Bank, but if enforced as a blanket policy, it would drive first time home buyers out of the market place in many areas of the country.

Currently according to research by the National Association of Realtors, first time home

The American Dream could be pushed further out of reach if too steep a change to down payment requirements were introduced.

 buyers reflected nearly 1/3rd of the market last year in real estate purchases. 53% were motivated to just own a home of their own. Another 33% bought a home just because they knew the timing of the current market place would offer affordability.

At present there exist many government loan programs such as FHA, VA and USDA Rural Development that offer low up front expenses and low interest rates. VA and USDA Rural Development do not require a down payment, and FHA requires just 3 1/2% down. Many first time home buyers are taking advantage of these programs, despite the requirements for higher credit scores than 5 years ago.

The pendulum swinging in the direction of what Wells Fargo proposes would deny many new prospective home buyers their chance at the American Dream, and would be too extreme a solution.

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