A group of federal regulators has announced a new standard for home buyers to obtain the best mortgage rates: only those who can provide a 20 percent down payment and have had no previous problems in paying mortgages can qualify.
This is to prevent practices that saw many risky home loans discarded into the financial system some years ago.
However, the proposal, which is set to be imposed this summer, was not well-received by some groups, as they believe that a 20 percent down payment is too high for many working-class borrowers.
The regulatory effort comes just as the Obama administration and House Republicans have created proposals to start winding down government-supported mortgage authorities Freddie Mac and Fannie Mae, partly by reducing the competitive advantage they have over banks.
This could include requiring the two mortgage companies to start charging higher fees. The objective is to lure private companies back into the mortgage market, which they left during the global financial crisis.
In the years leading up to the crisis, lenders used to hand off high risk loans to other companies for a fee and would continue to make risky loans.
Officials said the new regulation aims to correct that practice.
During the announcement, Sheila C. Bair, Chairman of the Federal Deposit Insurance Corp, said, “Properly aligned economic incentives are the best check against lax underwriting.”
The new paradigm was proposed by the Federal Reserve and the FDIC, while other regulators are expected to follow suit.