No matter which party wins, days of easy mortgage money are over

WASHINGTON — Partisan politics aside, presumptive Republican nominee John McCain proposed something March 25 that no other major presidential candidate has advocated in decades: Raising minimum down-payment levels for home mortgages.

No more zero-down deals. No more "piggyback" plans that combine 90 percent first loans with 10 percent seconds. No more "down-payment assistance" schemes where sellers indirectly supply all or most of the cash needed for the down payment.

McCain would even raise the 3 percent minimum the Federal Housing Administration requires.

That puts him squarely at odds with the Bush administration and Democratic leaders in Congress who are negotiating legislation that would cut FHA's minimum to zero — favored by the House — or 1.5 percent, favored by the Senate.

Proponents of low FHA down payments say they are necessary to allow moderate-income families to purchase first homes, and that if properly underwritten and serviced, they do not lead to extraordinarily high default or foreclosure rates.

McCain also said the mortgage-industry giants — congressionally chartered Fannie Mae and Freddie Mac — "should never insure loans when the homeowner clearly does not have skin in the game." He did not specify how much skin would be needed.

McCain's rationale: He thinks a key contributing factor to the national mortgage crisis was the tiny — or nonexistent — equity contributions lenders required during the boom years.

When the boom fizzled and home values fell, many borrowers found themselves in negative equity positions, owing more on their mortgages than the market value of their homes.

Though neither of McCain's potential Democratic opponents nor the White House has commented on his proposal, efforts to rein in down-payment minimums already are under way by major private mortgage lenders and insurers.

Fannie Mae and Freddie Mac have raised fees on new loans where borrowers have less than 25 percent equity. They also have increased minimum credit scores for low-equity mortgages.

Private mortgage insurers have tightened availability of new loans with less than 5 percent down by sharply raising credit standards for applicants and refusing to underwrite such loans in markets they designate as "declining."

The emerging trend in the private marketplace reverses one of the hallmark practices of the housing-boom years.

When the National Association of Realtors surveyed thousands of first-time buyers in late 2004 and early 2005, it found a stunning 43 percent had put no money into their purchases.

The same study documented the median down payment by first-time purchasers at just 2 percent, which dropped to 1 percent in high-cost areas such as California, where zero-down piggyback plans were wildly popular.

The net result, as the real-estate market began turning in mid-2005, was that large numbers of people started homeownership underwater.

Research by a subsidiary of First American found that by 2006, one out of 10 households who took out loans the prior year were already at a zero or negative equity position — sometimes more than 10 percent negative.

The same study found that one out of three purchasers nationwide had an equity cushion under 20 percent. Forty-four percent had less than 30 percent equity.

Areas where owners had the least equity — California, Colorado, Florida and Ohio — subsequently have seen some of the highest foreclosure and delinquency rates.

What's the national situation on equity holdings among all homeowners, including people who took out their mortgages long before the boom?

The Federal Reserve Board researches that question periodically through its "flow of funds" studies. Here's what it found most recently:

From the fourth quarter of 2006 through the fourth quarter of 2007, homeowners lost $387.5 billion in net equity holdings, mainly because of property devaluations in major markets around the country. The year-end $9.65 trillion in equity was the lowest figure since mid-2004.

At the end of 2007, according to the Fed, American homeowners' equity was 47.9 percent, down a full percentage point from the third quarter and 6 percent below 2003.

Any way you look at it, $9.65 trillion is a vast financial resource, and a national "loan to value" ratio around 50 percent means most homeowners still have hefty cushions.

But don't look for the return of mass-marketed zero-down mortgages any time soon. Whatever the politicians decide to do, the private marketplace is heading back to more traditional standards, where equity upfront was the rule.

Kenneth R. Harney: kenharney@earthlink.net