Regulators pushing for 20% down payments

It looks like regulators want to put a stronger emphasis on 20% down payments. This is a good thing for the financial system.

Banking regulators are pushing for mortgage-lending rules that require homeowners to make minimum 20% down payments on loans classified as lower-risk, according to people familiar with the matter.

The proposal is being floated as a way to rewrite the rules for mortgage lending to prevent a rerun of the housing bubble and financial crisis that resulted from years of easy credit. The Dodd-Frank financial overhaul law enacted last year enabled regulators to define a so-called gold-standard residential mortgage that would be exempt from costly new rules.

At least three agencies—the Federal Reserve, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency—back a proposal to require home buyers to put down at least 20% of the sales price in order to obtain one of these "qualified residential mortgages." One proposal would also require borrowers to maintain a 75% loan-to-value ratio for refinances, and a 70% loan-to-value for cash-out refinances in which the borrower refinances into a larger loan, according to people familiar with the matter.

Mortgage-finance giants Fannie Mae and Freddie Mac would also be exempt from the rules while they remain in conservatorship, according to these people. The U.S. took over the firms in 2008, and the Obama administration has proposed eventually winding them down.

The behind-the-scenes debate over the proposal could have far-reaching implications for how Americans finance loans, because it addresses how much equity new borrowers should have in their homes.

Having different rules for Fannie and Freddie creates a massive loophole in this proposal. It means banks would be protected during a housing downturn, but taxpayers wouldn't.