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20% down prices out buyers, Kerry says

Seeks less onerous rule on mortgages

John Kerry John Kerry
By Jenifer B. McKim
Globe Staff / June 2, 2011

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US Senator John F. Kerry yesterday urged financial and housing leaders to reconsider a proposal that would require some home buyers to make down payments of at least 20 percent to obtain low-interest mortgages.

The Massachusetts Democrat said the plan, offered by federal regulators earlier this spring, would prevent many credit-worthy borrowers from buying homes, further depressing the housing market.

“None of us — and none of you — want to see reform create an onerous unintended consequence: keeping middle-class families trapped in a cycle of paying rent when, in fact, they could well be paying mortgages,’’ Kerry wrote to Shaun Donovan, secretary of the US Department of Housing and Urban Development; Federal Reserve chairman Ben S. Bernanke; and Sheila C. Bair, head of the Federal Deposit Insurance Corp.

The possibility of hefty down payments is related to lending rules imposed last year as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

That law was created to limit risk-taking by lenders and prevent the types of irresponsible loans that led to the housing crisis. One new part of the law requires lenders to retain at least 5 percent of the credit risk of a mortgage when they sell a loan to another investor, unless the loan is considered low-risk. Federal regulators are considering a proposal to define low risk and may include a 20 percent down payment as one of the benchmarks.

Kerry said that in a state where property prices are above the national average — including Massachusetts — it is unreasonable to expect that buyers can afford to put 20 percent toward the purchase price of a home. He said that based on the median sales price for a single-family home in Massachusetts of $274,00, a buyer would need at least $55,000 in cash.

“The notion of a police officer or teacher or firefighter being forced to spend years trying to save the upfront money required for a 20 percent down payment is a daunting prospect,’’ Kerry said. “We can — and should — encourage sound lending without harming responsible buyers.’’

Kerry joins other critics of the proposal, including a rare alliance of mortgage lenders and consumer advocates who this week launched a campaign to educate people about the issue. The group includes national groups such as the Center for Responsible Lending, Consumer Federation of America, National Community Reinvestment Coalition, and National Housing Conference.

Kathleen Day, a spokeswoman for the North Carolina-based Center for Responsible Lending, said the organization is joining forces with lenders because it believes the requirement would affect middle-class homeowners. Day said her group believes regulators should define safer loans as those that verify a buyer’s income and ability to pay.

“What sparked the current crisis was not low-down-payment loans,’’ she said, “it was lack of underwriting.’’

Jenifer B. McKim can be reached at jmckim@globe.com.