20 percent down? Don’t bet on it.

Remember the proposed requirement from six federal agencies that homebuyers make minimum
20 percent down payments if they want the lowest interest rates?

Remember the controversy that erupted over the plan last spring, when labor unions joined with
bankers, civil rights groups, mortgage companies, realty agents and consumer advocates to get
it changed? A bipartisan group of 39 senators and more than 250 Democrats and Republicans in
the House even signed letters demanding that the agencies ditch the proposal on the grounds that
it would be deeply harmful to a housing market mired in deep trouble.

Half a year has passed since all that bubbled up, so here’s an update on the issue: The 20 percent
proposal is still alive, but it’s temporarily bogged down in agency reviews of the roughly 12,000
comments filed by interest groups and individuals. Almost certainly it will not be ready for final
adoption until the first quarter of 2012. Even then, there will be a mandatory one-year lag before
the new requirement takes effect, pushing the down payment standard into 2013 — well after the
presidential and congressional elections.

But can it survive in its current form that long, given the rip currents of the political year that’s
just getting under way? The agencies themselves — the Federal Deposit Insurance Corp., the
Treasury’s Office of the Comptroller of the Currency, the Department of Housing and Urban
Development, the Federal Reserve, the Securities and Exchange Commission and the Federal
Housing Finance Agency — are officially mum on the proposal during the comment review

The group includes strong proponents of the 20 percent rule who argue that the “qualified
residential mortgage” (QRM) language adopted by Congress in its 2010 Wall Street financial
reform legislation requires them to devise a national standard for safe, low-risk home mortgages
based on historical data on default and foreclosure risk. One of the statistical indicators of risk,
based on studies of Fannie Mae and Freddie Mac mortgages, they maintain, is the amount of
equity a borrower has in the property — the higher the initial equity, the lower the probability
of foreclosure. Any standard that does not include down payments, proponents insist, will be

But the three co-authors of the QRM provision in the reform legislation say Congress expressly
omitted reference to down payments and never intended that the agencies set an equity minimum
that would prevent up to 40 percent of buyers from qualifying for a low interest rate mortgage.

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In testimony last month before a House Financial Services subcommittee, one of the co-authors,
Sen. Johnny Isakson, said “if this rule goes into effect as proposed, it will be the last nail in the
coffin for the already crippled U.S. housing market… Poor underwriting led us into the housing
crisis, not down payments.”

Isakson, along with Sens. Mary Landrieu, and Kay Hagan, told the six agencies before they
published the proposal that down payments were rejected in congressional discussions as an
underwriting standard. The legislation intentionally left the door open for private mortgage
insurance to cover the financial risks of down payments below 20 percent, just as the
government-supervised mortgage investors Fannie Mae and Freddie Mac have permitted for

Though a spokesperson for Isakson declined to speculate whether, as rumored on Capitol Hill,
he would introduce legislation to kill the 20 percent plan if it were ever adopted, she did say in
an email to me that the senator has “faith that the regulators will make the right decision” and
that “all his focus now is on stopping [the 20 percent plan] from happening.”

The entire QRM controversy comes at a politically sensitive time for President Barack Obama.
Housing continues to be a lead weight holding back the economic recovery. His polling numbers
are plunging, plus key segments of his political base — unions, community and economic
development groups and consumer activists — oppose any move to force working families to
come up with more cash to buy a home. The six agencies’ rule — even sitting in proposed form —
is likely to be an attractive target for the president’s opponents next year.

The White House does not have the legal authority to dictate regulatory policy to independent
bodies such as the Federal Reserve and Federal Housing Finance Agency. But with Treasury
and HUD playing important roles in formulating the final rule on mortgages, Obama has a direct
pipeline into the policymaking process.

Bottom line: Don’t expect to see a 20 percent rule any time in the near future. Even independent
regulators don’t operate in political vacuums. They’ve either gotten the message already or they
will soon.

Kenneth Harney is a syndicated real estate columnist.

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