How does the government fix the mortgage meltdown mess to ensure nothing like this happens again?

Should buyers be required to have a 20% minimum down payment in order to purchase a home?  Is this the answer?   Lawmakers in the other Washington, not here in Seattle, are looking into this issue.   Congress is currently looking at the Quality Residential Mortgage issue:

As federal regulators wrestle with setting the definition of a qualified residential mortgage (QRM)–which under the Dodd-Frank Wall Street Reform Act would be exempt from risk-retention rules–a bi-partisan group of U.S. House and Senate lawmakers urged regulators not to be rigid in setting the rules.

Some people might think a large down payment provides more insurance that a buyer can handle the mortgage.  After all, if the buyer had the discipline to save a significant amount of money, then the buyer should have the discipline to make mortgage payments.  This is true, discipline is required to save a substantial down payment.

But was the lack of a 20% down payment the main source of failed mortgages and the housing meltdown?

From the truth about mortgage blog:

Mortgage default is not related as much to a high monthly payment, but to the depreciation of home values and higher unemployment.

A report released by the Boston Fed last week found that home price depreciation is a leading cause of mortgage default, challenging common arguments that attribute rising delinquencies to unaffordable mortgage payments.

“We find that the DTI ratio at the time of origination is not a strong predictor of future mortgage default,” the report said.   “A simple theoretical model explains this result.”

“While a higher monthly payment makes default more likely, other factors, such as the level of house prices, expectations of future house price growth and inter-temporal variation in household income, matter as well.”

The economists estimated that a 10 percentage-point increase in the debt-to-income ratio increases the probability of 90-day delinquency by just seven to 11 percent.

Conversely, a one percentage-point increase in unemployment rate raises this probability by 10-20 percent, and a 10 percent fall in house prices raises it by more than half.

From Senator Johnny Isaksen:

“We don’t have a down payment problem in this country, but rather an underwriting problem. I strongly urge regulators to rework their overly rigid down payment requirement for QRM. If left as is, it would make recovery in the housing market almost impossible.”

What happens to those who wish to buy a home, but don’t have the down payment?

Federal regulators have proposed a rule that would require most borrowers to come up with a 20% down payment on a home purchase. Buyers with less than 20% to put down would have to choose between higher fees and rates — up to 3 percentage points more — compared with folks who have the 20% or a 16-year delay while they save up the necessary down payment.

That’s how long it would take the typical American family to save enough money for a 20% down payment and closing costs, according to estimates of 2010 median income and home prices from the NATIONAL ASSOCIATION OF REALTORS® and the 2010 national savings rate.

When I read the excerpts from these other blogs, I’m seeing declining house values, unemployment, and bad underwriting as the causes for the financial meltdown.  My vote goes to bad underwriting as the main culprit.    I’m not seeing a low down payment as the culprit.  Everyone knows that changes  are still needed for our financing rules, but is the 20% down payment the answer?  If you think, no, then please alert your congressional representatives in Washington.

Here in Washington State you can contact:

Senator Patty Murray

Senator Maria Cantwell

Rep. Jay Inslee

Rep. Rick Larsen

Rep. Jaime Herrera Beutler

Rep. Doc Hastings

Rep. Cathy McMorris Rodgers

Rep. Norm Dicks

Rep. Jim McDermott

Rep. Dave Reichert

Rep. Adam Smith