Banks and Regulators Battle Over New Minimum Down Payment Requirement

By Kyle Chezum Updated on 2/4/2011

2/04/11

Government regulations require lenders to retain at least 5% of the financial risk of any mortgages that lenders plan to package and sell as securities.  This stricter regulation comes as a response to investor outcry and litigation over bank sales of toxic mortgage backed securities.  With a risk retention requirement in place on the lender side, regulators hope lenders will operate with more caution when originating loans.

But it’s not just the government and taxpayers calling for banking reform.  Major bank leaders, including JP Morgan Chase CEO Jamie Dimon, fear that the nation’s economy won’t fully recover until standardized laws and practices are set in place.  Still, this doesn’t mean that bankers are in favor of regulation.  Historically, banks have stood against additional regulation and have profited more through deregulation than otherwise.

Regulators want banks to require a down payment of at least 20% on any qualified residential mortgage administered.  If a bank originated a loan with a down payment lower than this, the risk would remain entirely with the bank and couldn’t be passed on to investors.

Banks don’t want this.  Many large lenders have requested a down payment level of 10% or less for mortgages that they plan to securitize.  But some banks have taken a higher road.  Wells Fargo, in December, informed regulators that it planned to require a 30% down payment on all loans destined for securitization.

It’s expected that regulators will set the down payment requirement at 20%.  Some industry experts fear that this move will stifle the housing market as fewer buyers are able to purchase homes due to the high down payment expectation.  The regulations must be passed by April 21.