The Myth of “Skin in the Game”

When discussing the future of housing finance, nothing stirs more passion than the question of what sort of down payment is appropriate when buying a home- 0%? 5%? Maybe 10% or even 20%? It’s called “skin in the game”.

While all sides believe their positions are rooted in fact, hard data is rarely cited. For those in the ‘bigger is better’ camp, opinions are ‘supported’ by vague incantations like ‘low down payments caused the real estate crisis’ or, the government is ‘wasting’ tax payers’ money by subsidizing home ownership. Many of these advocates for larger down payments and no down payment assistance- typically homeowners themselves- fail to acknowledge that they too benefit from a significant federal subsidy- the home mortgage interest deduction.

The level of emotion and sometimes outright hostility engendered by this debate can only be explained by deeply held opposing world views on who is qualified to own a home. It’s certainly an important debate as housing policy is reconsidered. It would be interesting to understand more about the forces that shape these views, but we’ll leave that to social scientists and other academics.

You’ve probably figured out by now that we believe high loan-to-value lending is safe and sustainable when executed responsibly. We were looking for fresh data to support that view and came across a brief entitled Don’t Mandate Large Down Payments on Home Loans” from the Center for Responsible Lending. It makes the case for a rational and pragmatic approach to housing finance that won’t further dampen a weak real estate market or, take undue risks that would burden our financial system.

A few highlights from the brief:

  • “Between 1990 and 2009, more than 27 million mortgages were made with low down payments. These loans did NOT carry the risky features found in subprime loans.
  • Increasing down payment requirements would materially shrink the mortgage market with little increase in loan performance.
  • Based on average home prices, it would take 14 years for the typical American family to save enough money for a 20% down payment.
  • Homeownership remains a key driver of personal and national economic prosperity, and will be fostered by responsible low down payment loans.”

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Let us know what you think and, no matter what your view, share your data behind it. This debate is far from over!