Will Regulating Down Payments Decrease Foreclosures and BankruptcyIn a rare move, mortgage banking officials and consumer advocates have joined forces to urge U.S. federal regulators to rethink a proposal which could make it nearly impossible to get a mortgage unless you make a down payment of 20 percent on a home first.

The groups argue that the income and down payment requirements six federal regulators proposed in March are a regulatory overreach that would set up an unnecessary barrier to homeownership for low-to-moderate income families.

They said regulators should focus on “toxic” home loan products such as “no-doc” loans that required no documentation or proof of income rather than taking steps that could end up restricting homeownership, which they touted as a significant wealth-building tool for many Americans.

It’s not that the regulatory body is trying to directly ban low down payment loans, it’s that some of their proposed policies could provide an environment where mortgage lenders have very little to no incentive to provide these types of loans to buyers. While this may have seemed to be a move to reduce the  number of foreclosures and bankruptcy filings caused by homeowners in these risky mortgages, the truth is that if it is implemented it may cause a “great depression” in the housing industry.

Much of the growth in the housing industry during the boom is attributed in sales to working-class and lower-middle class families.  If these families are required to make 20 percent down payments before they can get a mortgage loan, we could see existing homeowners falling to foreclosure because they can’t sell their homes because there are so few buyers who meet the requirements for down payment money. The domino effect could cause even more bankruptcy filings as existing homeowners turn to bankruptcy to free themselves from home mortgage debt.

(source: Marketwatch.com )

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