Banks Peddling Downpayment Myths

A blog about business and economics.
April 25 2013 12:09 PM

Beware Bankers Peddling Downpayment Myths

If you read the business pages, you've probably seen an article or two featuring bankers whining about new regulations that "force" them to demand large downpayments from home purchasers. The problem here is that, as Felix Salmon writes, there is no such rule.

Here's the real rule. These days when a bank makes a mortgage it generally sells the right to the income stream the mortgage is expected to generate to someone else. The sold mortgages are then "securitized"—bundled and tranched—in a way that should, if done right, spread risk around better. The relevant new rule is that under Dodd-Frank banks must hold at least 5 percent of the mortgages they make on their own books. The idea is that forcing some skin in the game will prevent some of the nakedly corrupt underwriting that we saw during the bubble years. The relevance of the 20 percent downpayment is that regulators have created a loophole, that allows banks to avoid the 5 percent rule if they make a "Qualified Residential Mortgage"—basically an old-fashioned plain-vanilla 20 percent downpayment rule. What banks want is for the QRM exemption to grow so large as to swallow the whole thing and turn the skin in the game rule into a nullity.


Throat clearing and policy details aside, however, the larger issue is what do we want from the mortgage system. Practice from the aughts was for public policy that prioritized maximizing the number of people who could qualify for a mortgage at any cost. The lesson of 2007-2008 is that the cost of that framework turns out to be pretty high. A regulatory scheme that discourages banks from making low-downpayment mortgages really will reduce the number of people who get mortgages. But is that so bad? I don't see how you can look at the experience of the past ten years and conclude that it is.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.



Blacks Don’t Have a Corporal Punishment Problem

Americans do. But when blacks exhibit the same behaviors as others, it becomes part of a greater black pathology. 

I Bought the Huge iPhone. I’m Already Thinking of Returning It.

Scotland Is Just the Beginning. Expect More Political Earthquakes in Europe.

Lifetime Didn’t Think the Steubenville Rape Case Was Dramatic Enough

So they added a little self-immolation.

Two Damn Good, Very Different Movies About Soldiers Returning From War

Medical Examiner

The Most Terrifying Thing About Ebola 

The disease threatens humanity by preying on humanity.

Students Aren’t Going to College Football Games as Much Anymore, and Schools Are Getting Worried

The Good Wife Is Cynical, Thrilling, and Grown-Up. It’s Also TV’s Best Drama.

  News & Politics
Sept. 19 2014 9:15 PM Chris Christie, Better Than Ever
Sept. 19 2014 6:35 PM Pabst Blue Ribbon is Being Sold to the Russians, Was So Over Anyway
Inside Higher Ed
Sept. 19 2014 1:34 PM Empty Seats, Fewer Donors? College football isn’t attracting the audience it used to.
  Double X
The XX Factor
Sept. 19 2014 4:58 PM Steubenville Gets the Lifetime Treatment (And a Cheerleader Erupts Into Flames)
  Slate Plus
Slate Picks
Sept. 19 2014 12:00 PM What Happened at Slate This Week? The Slatest editor tells us to read well-informed skepticism, media criticism, and more.
Brow Beat
Sept. 19 2014 4:48 PM You Should Be Listening to Sbtrkt
Future Tense
Sept. 19 2014 6:31 PM The One Big Problem With the Enormous New iPhone
  Health & Science
Medical Examiner
Sept. 19 2014 5:09 PM Did America Get Fat by Drinking Diet Soda?   A high-profile study points the finger at artificial sweeteners.
Sports Nut
Sept. 18 2014 11:42 AM Grandmaster Clash One of the most amazing feats in chess history just happened, and no one noticed.