On Tuesday, federal regulators agreed to drop the requirement that force borrowers to make a 20% down payment in order to get a high-quality mortgage. This tight standard was originally proposed to limit credit. However, this rule is being dropped as big entities such as Fannie Mae and Freddie Mac are planning to guarantee loans with down payments of as little as 3%.
Jamie Dimon, CEO of J.P. Morgan Chase & Co. made a statement on how most forms of credit have loosened except mortgages. According to the 2010 Dodd-Frank law, regulators proposed that banks must either hold 5% of the risk from mortgages they package into securities and sell to investors or they must require borrowers to make a 20% down payment to get the loan. This was a way to regulate the credit lines given out which would stop a future housing market crash from happening.
Instead of the 20% down payment requirement which added an extra layer of complexity that can constrain lending. Lenders will now have to hold 5% of the risk from mortgages or they can try and verify a borrower’s ability to repay the loan and ensure their debt-to-income ratio does not exceed 43%.
This is big for the housing market because it will allow the housing market to grow more rapidly. U.S. home sales rose 2.4% last month which is relatively weak, because we are still down roughly 2% from last year.
Sources: Wall Street Journal