In what has to be a collection of some of the dumbest quotes of the year by an Eclectic Mix of Idiots: 20 Percent Mortgage Down Payment Under Fire

To call it an uneasy alliance is too simple, but that's exactly what the characters were going for when they called their morning press conference in downtown DC.

The new president of the Mortgage Bankers Association, Dave Stevens, arrived carrying a message from Wall Street and Main Street money makers in the breast pocket of his navy blue suit; he was seated in a row just down from Ethan Handelman of the National Housing Conference, who sported a pony tail and an agenda favoring low-income borrowers.

In between them was Ken Edwards, of the Center for Responsible Lending, who referred to the group as, "an eclectic mix."

Adversity makes strange bedfellows, and today's mortgage market is nothing short of adverse. The group came together to argue against what Edwards called "draconian requirements" for a the proposed "Qualified Residential Mortgage" (QRM) standard. The QRM is part of new risk retention rules, mandated by the Dodd-Frank Financial Reform legislation of last year. The proposal, which is under comment period until the end of next week, includes a 20 percent down payment for a home loan to qualify as a QRM. If the loan does not meet the QRM standards, the lender must hold on to 5 percent of the risk.

They call that "skin in the game," but banks big and small say it will make mortgages more expensive and difficult to obtain, while consumer advocates say it is nothing short of discrimination.

"We believe that the regulators, while being very thoughtful through this process, have overreached by adding loan to value and DTI (Debt to Income), which will create societal boundaries, which we believe were unintended by those who drafted the law in the first place," said Stevens, who as recently as a few months ago headed up the Federal Housing Administration (FHA), currently the only low down payment option available for low-income borrowers.

John Taylor of the National Community Reinvestment Coalition was a tad more blunt: "It's coming from the very agencies who had the job and the responsibility to prevent the predatory lending, the kind of abusive lending products, that got us into this mess. We now get a solution that's going to constrict access to housing in a way that we haven't seen since the Jim Crow era."

These gentleman join nearly 40 Senators who have signed onto a letter calling for the QRM proposal to be re-written more broadly. They characterize the 20 percent down payment as "unnecessarily tight."

I personally don't know what the right down payment number is, 10, 20, 5 percent? I don't claim to have any better answers than anyone else. I just report what everybody else claims is right. But here's a thought:

All these organizations, companies, entities, etc. want to see the free flow of credit again. That's really the only way housing can regain its footing and the economic recovery can start cooking with gas. The nation's banking system was infected with greed and that infection spread to everyday homeowners and individual investors all over the nation. In the end, it was deadly. Now the government, federal regulators, whoever, are trying to re-invent the market, to make sure it is infection-proof in the future. But now it seems as if many of the players who themselves were hurt by this crisis would rather see the ills of the mortgage market treated with Novocain than with medicine.

I haven't read this much nonsense in a long time.

Skin in the deal

There's a self coined concept in banking I like to use called lender's risk versus equity risk. Equity risk is that portion of money used as a down payment by The Owner to buy a property.

If the property goes down in value, that person loses their equity first before the lender is exposed to risk or losses.

Lender's risk is the risk a lender takes in providing financing to a borrower. The larger the down payment the lower the lender's risk. The smaller or in some case no down payment the higher the lender's risk. But to some degree, if the down payment is too small then the lender is really taking equity risk without the ability to participate in the upside if the value of the home were to increase.

There is absolutely no reason any bank should be able to lend deposits insured by the FDIC or any government agency where the lender is taking on more than lender's risk because the property owner has put very little or no cash or skin into the deal. It's absurd to suggest otherwise. One of the reasons we are in a banking crisis is because lenders took far too much equity risk by allowing 3%, 5% or no money down loans, or Neg. Am. loans.

It's a concept all about risk management, and since we are lending federally insured money most of the time in this country, it should have a prudent underwriting.

Falsehoods and Clap Trap

1) Will it make lending more expensive? No. Larger down payments will force prudent lending and borrowers to have real skin in the game. More skin in the game means less risk to the lender! As a banker, I offer lower rates on loans where the borrower puts up more cash as a down payment or equity, because the loan has less risk!

As borrowers realize they don't have a 20% down or like me not interested in putting $100K down on a $500K house, the price of homes will fall and maybe fall hard. Then, the cost of housing and lending will become even cheaper not more expensive.

Sure, it will make lending more expensive for those who want to borrower with less skin in the game, and they should pay more because there's more risk!

2) Is it Discrimination? Absolutely not! The concept is for borrowers to have solid skin in the deal, not a chump change down payment of 3-5%, which is easier to walk away from. Just because someone doesn't have a 20% down payment does it mean lending standards are discriminatory.

And, as prices fall that 20% down payment becomes a small dollar amount in the future and thus easier for borrowers in the future to save up for in buying a home, which would make real estate more affordable.

3) Constrict Access to Capital? More clap trap. The larger a down payment the easier it is to make a loan by a bank because there is less risk. I don't know what planet John Taylor of the National Community Reinvestment Coalition lives on, but he's not even close!

As a lender, we are for more excited about lending the more not less skin a borrower has into a deal. Access to credit won't get tighter, but the number of qualified borrowers will shrink!!! At least until real estate values fall further and a new equilibrium price is reached at lower values.

4) Down Payments and Debt to Income?

"We believe that the regulators, while being very thoughtful through this process, have overreached by adding loan to value and DTI (Debt to Income), which will create societal boundaries, which we believe were unintended by those who drafted the law in the first place," said Stevens, who as recently as a few months ago headed up the Federal Housing Administration (FHA), currently the only low down payment option available for low-income borrowers.

Down payments and DTI are the corner stones of a sound credit decision and lending, and Stevens has an issue with that?

5) 20 percent down payment as "unnecessarily tight."

Anything less than a 20% down payment will push lenders into the category of taking equity risk, which is not what a lender's role is in lending. And if we get back to the notion of lending FDIC insured deposits or federally guaranteed money through Fannie, Freddie or FHA, we should have banks and lenders lending within lending risk.

Common sense has eluded the Eclectic Mix of Idiots and 40 Senators

Here's what the Eclectic Mix of Idiots aren't telling YOU:

If banks would only lend money when they can demonstrate they are only taking lender's risk supported by prudent skin in the deal and documented cash flow, we probably wouldn't be in this banking and real estate nightmare.

Furthermore, low income home buyers can easily afford to buy a home if the Eclectic Mix of Idiots would support a free market (real estate market) and values fell to a level supported by low income, and supply and demand. In that world, low income homeowners can afford real estate easily.

It's only in this world where the government attempts to prop up real estate values where low income earners need assistance in the form of flimsy lending standards to qualify to own a home.

Nor do they mention that owning a home is no more a human right or sound decision then renting a home! Why should we as a government have or promote a bias to either?

Hope all is well.