Since the housing bubble collapsed, it's been harder for many Americans to qualify for a home loan. But soon, it might get even more difficult.
The government is reshaping the mortgage market. And right now there is strong political support for requiring much bigger down payments for most home loans. Powerful congressional Democrats and Republicans support the move, as does the Obama administration.
In a matter of weeks, federal regulators are expected to unveil new rules for home loans. The buzz is that the rules could translate into mandatory 10 percent or even 20 percent down payments for most new loans in the U.S., which would be a significant change.
A Mandatory Down Payment
For the average-priced home that would mean saving $18,000 to $36,000 for a down payment. Some experts think that's a good idea.
"We put too many people into houses they weren't qualified to buy, they didn't have income [and] they didn't have skin in the game," says Edward Pinto, a fellow with the American Enterprise Institute.
He thinks requiring 20 percent down is probably going too far and favors a 10 percent down payment rule. He says that would be good evidence of a person's ability to handle owning a house.
"And if people know they need the down payments, they'll start saving for them," he says. "You can't just buy lattes if you need to be saving for down payments."
A Return To The 1960s?
Some economists and many housing advocates don't like the proposed down payment rules.
They say this would set the country back more than 30 years in terms of the ability for minorities and people without family wealth to buy houses.
Mike Calhoun, the president of the nonprofit Center for Responsible Lending, estimates it would take seven years for the average American to save up even a 10 percent down payment.
"If it made a big difference in the performance of mortgages it would be worth it," he says. "But the real key is not the down payment."
Calhoun says some loans with smaller down payments perform quite well. He says the housing bubble and subsequent foreclosure mess happened mainly because lenders got sloppy in other ways. For example, banks gave out no-document loans where they didn't even check to see if a homebuyer made enough money to pay back the loan.
"All those other safeguards were totally abandoned," he says.
Calhoun says "bailout shock" is the reason why the big down payment rule is so popular right now among both Democrats and Republicans
"The taxpayers got stuck with a big bailout, and so people sort of want to throw the baby out with the bath water and say, 'Let's never do anything like that again.'"
The Death Of 30-Year Fixed-Rate Loans?
The down payment is just one big change. Lawmakers are talking about dismantling the government-backed mortgage finance giants Fannie Mae and Freddie Mac. And Pinto, of the American Enterprise Institute, says that for decades Fannie and Freddie have subsidized one of the bedrocks of the current mortgage industry: the 30-year fixed-rate loan.
"That exists because the government subsidizes it," he says.
Going forward, banks might prefer to push borrowers toward shorter-term loans instead, perhaps 20-year fixed-rate loans. In most other countries, loans with shorter-term fixed rates are much more common. But going down that road could also make it more expensive to buy a house.
Calhoun, of the Center for Responsible Lending, doesn't like that path. But Pinto says in the long run it might help homeowners.
"The problem with the 30-year loan — it amortizes incredibly slowly," Pinto says. In other words, homeowners pay a ton of interest up front in the first years, and it takes a long time to pay off what they owe.
Twenty-year loans do have moderately higher monthly payments, but Pinto says borrowers would quickly find themselves owning a bigger chunk of their houses.
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