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  • The real estate collapse of the last three years has caused the federal government to come up with regulations designed to avoid this from happening again. Mortgage regulation rules are being presented under the Dodd-Frank Act of 2010. The Dodd-Frank Act is part of the far-reaching financial regulatory reform that sets out to promote financial stability and improve the accountability and transparency of the financial system as a whole. This was a reaction to the list of bail-outs of companies that were “too big to fail” and required on-going hand-outs from taxpayers to stay in business.

    One of the changes proposed under this Act is to force mortgage lenders to take 5 percent of the credit risk of mortgages pooled in securities if the mortgages do not meet certain requirements. These are mortgages that are put together as an investment unit and which can be bought or sold in a similar way to stocks in a company. One of these requirements, which is making mortgage lenders unhappy, is that borrowers must pay at least 20 percent of the home’s purchase price as down payment. The idea behind this rule is to stop borrowers from buying homes they can’t afford just because loans are available. According to some analysts, cheap and available loans were one of the reasons house prices increased artificially and later crashed when the market came to its senses and corrected itself. Canada has a similar down payment requirement as part of their comparatively stricter financial regulatory system, which may have had a lot to do with why Canada was not affected as seriously by the real estate driven recession of 2009.

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    Critics of the 20 percent down payment rule claim this will price out many borrowers who can’t afford to come up with 20 percent of a home’s purchase price. Figures from 2010, seem to support this claim. Around 39 percent of home buyers in 2010 put a down payment of less than 20 percent, according to a poll by CoreLogic. The question, of course, is if the low down payments are because people can’t afford to pay 20 percent or because they are not required to do so? Additionally, even if many buyers can’t afford the 20 percent rule, is that necessarily a problem? Could it be argued that buyers who can’t afford to pay 20 percent of their mortgage are simply not in a position to buy and should focus their efforts on saving for a down payment? Of course, the real estate mortgage industry claims it is time for the government to stimulate the mortgage industry not weigh it down with restricting regulations. How do you feel? Is this regulation a much needed protection against another crash, or is it an example of federal government choking the growth the real estate industry so desperately needs?

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