A recent New York Times article entitled “Down Payment Rules Are at Heart of Mortgage Debate” reported that “lenders and consumer advocates — rarely on the same side of the issue — are now cautioning against down payment requirements.” Cited as justification was a study by the Center for Community Capital at the University of North Carolina at Chapel Hill. It found that only 2,500 borrowers had suffered a foreclosure out of 46,000 low-income homeowners who received traditional 30-year, fixed-rate mortgages with a small down payment. I‘ll call those 2,500 borrowers and raise 3.1 million families. Since 1975, one in eight of the 25 million families getting an FHA insured loan suffered a foreclosure from their 30-year, fixed-rate mortgages with a small down payment. The dashed American dreams of these families trumps the 2,500 in the UNC study. America’s homeowners have already experienced the horrific impact of the government’s successful effort to loosen underwriting standards that drove the boom that went bust. Let’s not repeat the same mistake.
Based on FHA’s 80 years of experience with tens of millions of loans, the solution is clear. Balance the size of down payment with a loan term ranging from 15- to 30-years along with a borrower’s willingness and ability to pay. Combine with best practices like risk sharing by originator/servicers and the nightmare at FHA can be put behind us.