20% Down? The Changing Landscape of Down Payment Rules

I read this article in the NY Times yesterday, and I have to say I come down pretty strongly on the need to keep housing down payments high.  The arguments made by Professor Roberto G. Quercia clearly demonstrate that data supports the notion that certain groups who cannot afford to put a down payment on a house are reasonable risks in terms of default.  However, I think the ability to pre-qualify such candidates would be cumbersome and less reliable than the down payment criteria.  Further, I’m swayed by the arguments later in the article that state:

Professor Quercia’s analysis underestimates the psychological and practical importance of the down payment. Borrowers who saved up for down payments may have budgeting skills that later help them make their payments, they argue, and borrowers with equity in their homes are less likely to walk away altogether, rather than try to find a solution.

I buy this.  To me the ability to save for a down payment suggests that the applicant has at least some of the personal finance behaviors necessary to maintain a mortgage.  Furthermore, anything that creates more incentive for people to stick to their obligations (i.e. not walk away from their home) is probably a good thing economically for the country.

What do you think?  Does a down payment disenfranchise so many potential home owners that it’s killing the American dream or is it a critical component of determining whether or not someone is a reasonable risk to offer a mortgage to?

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