This Housing Puzzle Is Still Mysterious

The 20% down payment requirement being floated by the Obama Administration is so severe - we haven't had anything like that in more than seventy years - that it means the effective end of middle-class home ownership in America. It means the end of real estate as gravy train for the suburban set, where the GOP is most at home. It made me wonder why the GOP has been urging this policy forward. After all, the GOP has thrived on real estate sales for decades.

Well, apparently there was supposed to be a Giant Loophole in the proposal. But the Obama Administration removed the Giant Loophole. As it now stands, this proposal is like an open invitation to suicide: If the GOP destroys the middle class in order to reign in real estate speculation, the GOP will end up being snuffed out too. So, this proposal can't possibly survive in its current form - it would be the most-hated law in American history - but what will replace it?:

Senators involved in writing part of a broad financial overhaul measure say they are dismayed that the Obama administration proposes carrying out their plan by pushing home buyers to come up with hefty sums of cash at the closing table.

The legislation, enacted last year, required banks that pool mortgages and sell them as securities to retain at least a 5 percent stake in those loans. The idea was that banks should have some “skin in the game” instead of selling off the loans and hence avoiding losses should the loans go bad.

At the time, a group of senators — led by Sens. Johnny Isakson (R-Ga.), Mary Landrieu (D-La.) and Kay Hagan (D-N.C.) — successfully pushed to carve out exceptions for certain types of relatively safe mortgages. They left it up to regulators to determine which loans should be exempt.

But the proposal that regulators unveiled last month surprised the lawmakers.

“This is not at all what we intended,” Isakson said in an interview Monday.

Under the plan, mortgages with a 20 percent down payment were deemed safe. That means banks would have to retain a stake in loans with smaller down payments, a costly requirement that the industry said it would pass on to borrowers in the form of higher interest rates and fees. Isakson, who owned a realty brokerage for three decades, said that lawmakers debated but intentionally rejected imposing a minimum down payment requirement for fear of locking millions of creditworthy borrowers out of the housing market.

...But by raising the 20-percent-down issue, regulators strayed from the intent of the law, said Hagan, whose state includes large mortgage insurance firms. Many lenders require borrowers to pay private mortgage insurance if they put down less than 20 percent. In a letter to regulators, the senators said loans with that kind of insurance result in lower losses for lenders and fewer foreclosures than similar loans that lack insurance.

...Last year, six out of 10 borrowers in the United States put less than 20 percent down, according to LPS Applied Analytics. In sections of the pricey Washington market, nearly all borrowers put down less than 20 percent — including about 86 percent of borrowers in Prince George’s County and 80 percent in Prince William County.