The housing market is showing signs of life as home prices rise and mortgage-backed bonds return, but the revival may not gain full steam until regulators sort out one of the thorniest problems: the appropriate size of a down payment on a house.
After the housing collapse, initial reform proposals emphasized the need for buyers to put down a large chunk of money. The reasons seemed sensible and obvious. Many of the mortgages that went bad involved tiny down payments — if any at all — and studies have shown that borrowers with a larger amount of equity in their homes are less likely to default.
“If our goal is to prevent foreclosures,” said Paul S. Willen, a senior economist and policy adviser at the Federal Reserve Bank of Boston, “I can’t think of anything more effective than requiring a down payment.”
In a surprising reassessment of the causes of the housing mess, however, many lawmakers, lenders and consumer advocates are now cautioning against rules that would require many borrowers to come up with significant down payments. Their main concern is that such efforts could end up cutting the supply of mortgages to lower-income borrowers, who simply do not have the money to put down. They also contend that the subprime debacle has distorted the issue.
“The problem with this conversation is that it’s like discussing the future of shipbuilding from the deck of the Titanic,” said Roberto G. Quercia, director of the Center for Community Capital at the University of North Carolina, Chapel Hill. “There’s a lack of perspective.”
Quercia studied mortgages in a special program for low-income borrowers, typically those with minimal down payments. From 1998 through the end of last year, 5.5 percent of the mortgages ended up in foreclosure, he found. Subprime mortgages made during the last housing boom, regardless of down payment size, had far higher foreclosure rates, roughly 25 percent.