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.
