There are a number of regulations and revisions that are being worked on in response to the mortgage mess that played a major role in creating the real estate bubble.

Everyone can agree that changes are necessary, but I'm starting to see an alarming trend in the angle of the government's response. There is one thing that has really caught my eye lately making me think that homeownership, which is at the core of the "American Dream," will become more difficult to attain for many hard working families.

The government is currently working on defining what constitutes a "quality residential mortgage" (QRM), and anything that falls outside of these qualifications will be met with much higher interest rates. Under the current proposal, for example, a QRM would require a minimum 20% down payment. There are a number of other requirements under the current proposal for a loan to be defined as a QRM (i.e. debt to income ratios and minimum credit scores), but only the 20% down payment requirement is being challenged by the National Association of Realtors, the Center for Responsible Lending, the Mortgage Bankers Association, the National Association of Home Builders, the Community Banking Mortgage Project, and the Mortgage Insurance Companies of America. They are challenging based on studies that show a higher down payment alone does not significantly increase the risk of default.

Considering the consequences, is a 20% minimum down payment a good idea if it does not significantly reduce the risk of default?

A 20% down payment requirement will mean a multitude of first time home buyers will not be able to purchase a home if they are met with significantly higher interest rates for lower down payment loans. This will create less demand in an already weak housing market. By not being able to buy, an increased demand will be placed on rental homes which are already forecasted to see double digit rent increases over the next couple years.

Here's an example to put it into perspective: A first time buyer who is willing to spend $1,500 per month towards the principal and interest of a loan could currently handle a $280,000 loan amount with a 5% rate. If rates on loans that were not considered a QRM were 3 points higher, then that same buyer could only handle a $205,000 loan. That's a nearly 30% drop in buying power/affordability!

BOTTOM LINE: I agree that there are changes needed to be made, but I have a growing concern over how damaging these sweeping changes could be. We have worked with a lot of families who were able to seize the "American Dream" by putting their own roof over their family's heads. Many of these families were able to do so thanks to a more manageable down payment. The reason it has worked out so well for these families is because they bought a home that they could afford, on a monthly basis, that still allowed them to live their lives and grow their savings.

I suppose the bottom line remains that now is an unprecedented time of affordability for prospective homeowners, and that an unprecedented time isn't something we can always count on. Moreover, the increased rental demand likely to result from the proposed changes reaffirms what an amazing opportunity this market and the current financing climate is for real estate investors.

- Robert E. Wasser - Seattle and Bellevue real estate news, blog, market trends, and statistics