Medford MA and the Proposed Changes to Downpayments for New Mortgages

Medford Square, Medford Massachusetts, April 2010

(Medford, MA) Recently there has been proposed some significant changes to the downpayment requirements for what are called Qualified Residential Mortgages. Lenders are suggesting for private mortgages that buyers will need to have 20% downpayments for these new mortgages. This is to remove the liability that the lenders would face based upon new guidelines the government is proposing that lenders retain up to 5% liability on all mortgages they write to guarantee the mortgages once they are sold off to other investors & groups.

The lenders argue that having to retain an interest in the loans they write will unfairly burden them and lessen their liquidity to write other loans. The government seeks safer guidelines to avoid situations such as what lead to the Great Recession we experienced from 2006-2011 in the housing market & elsewhere.

This proposal by both sides is potentially quite serious to buyers & sellers in several ways. Recently the Natioal Association of Homebuilders (NAHB) hosted a teleconference and many different groups weighed in on the issues. RISMedia wrote an interesting article on the teleconference RISMedia Teleconference Article .

Here in Medford, MA our average home price is in the $350K range which attracts quite a group of buyers. The 20% downpayment would severely hamper buyers to save up such funds or pay a premium of 2 points for a privately backed loan. This would further entice especially first time homebuyers to remain with FHA & other government loan programs. With the enhanced requirements we would most likely see a decrease in home values as a result of the smaller pool of qualified buyers. Alternatively we'd see much higher demand for rental properties as potential buyers seek to save up for a 20% downpayment or work on their credit ratings for a government backed loan. I would equate the scenario to squeezing hard on the middle class. The poorer class & wealthier classes would feel less of this but making the transition up in class will be quite difficult.

I can't help but feel that once again it's the big lenders that want their cake and eat it too. They want to write LOTS of loans and sell them off to investors but yet they don't want to guarantee or take any risk in the deals, kind of makes me think of them saying "we lent money to this person, but oh no we don't trust this person". Before they wrote loans and no one even bothered to ask how good the underlying loans were & because there really was no accountability by the lenders everything was "out of sight, out of mind, not my problem". I do believe we need to strengthen lending & real estate markets but allowing the lenders to get off the hook will only encourag them to once again play fast and loose with the loans. Tricky situation to navigate. This will be interesting to watch unfold.

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