Housing officials criticize 20% down-payment proposal
Down-payment requirement angers senators
Down payment proposal could make a mountain out of a mortgage
Regulators, mortgage servicers agree on reforms
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Under the plan, banks would have to retain a stake in the home purchase loans they make to borrowers who put down less than 20 percent. The banks say that the requirements would be costly and that those costs would be passed on to borrowers in the form of higher interest rates. That would effectively shut millions of families out of homeownership.

At a House subcommittee hearing Thursday, Rep. Barney Frank (D-Mass.) said the arguments against setting such a high threshold are “persuasive.” A 20 percent down payment “does seem very high,” Frank said.

Bob Ryan, acting commissioner of the Federal Housing Administration, agreed that the proposal has the potential to deny affordable loans to creditworthy borrowers. Ryan urged serious consideration of another option in the proposal that would set the down payment at 10 percent.

“We are definitely concerned about 20 percent and the impact,” Ryan said.

Since the proposal was unveiled last month, a coalition of consumer groups and civil rights advocates has joined the real estate industry to lobby against the high-down-payment initiative. They say saving the upfront cash is an especially tough hurdle for first-time buyers and minorities, who rely heavily on low-down-payment loans.

The six federal agencies involved in crafting the proposal — including the Federal Deposit Insurance Corp. and the Federal Reserve — will gather public comment on it through June 10. The plan would take effect a year after it is finalized.

But differences among the participating agencies surfaced at the hearing.

Ryan, whose agency is part of the Department of Housing and Urban Development, aligned himself with the 10 percent alternative. He argued that down payments alone are not the most reliable predictor of a borrower’s ability to sustain a loan, and he pointed to other factors, such as a borrower’s credit score. His agency insures low-down-payment loans and caters to low-income borrowers and first-time buyers.

But the Federal Housing Finance Agency — which oversees mortgage financiers Fannie Mae and Freddie Mac — analyzed loans sold to both companies from 1997 to 2009 and concluded that lowering the down payment to 10 percent would not greatly boost the share of loans exempt from risk retention.

The share of home purchase loans would have increased by just 5 percentage points, from 27 percent to 32 percent and those additional loans would have been riskier, Patrick Lawler, FHFA’s chief economist, told lawmakers.

Some consumer advocates reached similar conclusions. To buy a home for $172,100, the median national price, a borrower making a 10 percent down payment would have to come up with nearly $26,000, including closing costs, according to the Center for Responsible Lending. It would take a middle-income family about nine years to come up with the cash.

“Even a 10 percent down payment would put homeownership beyond the reach of many creditworthy families who would otherwise have succeeded in homeownership,” Ellen Harnick, senior policy counsel at the center, said in her testimony.

Do Pres. Obama and Treasury man Geithner want to control the banks, just as they have taken over GM? Will the government assert political direction of the financial system in place of market forces, or in place of the rule of law as enforced by bankruptcy judges?

These hot topics have been discussed in a recent Politico story, a Wall Street Journal op-ed by my friend Stuart Varney, and an IBD editorial called “Federal Takeover.” Much of the discussion centers on bank paybacks of TARP money. In particular, banks in Louisiana, New York, Indiana, and California (four in all) have offered to pay back $340 million to Uncle Sam. IBD speculates that the Treasury declined to accept these payments.

Melissa Francis and I discussed this today on CNBC, and almost immediately the Treasury Department called one of my producers and e-mailed a quarterly update of all TARP payments made by the Treasury that include capital-repayment details. It turns out that the Treasury has in fact accepted TARP repayment: The Bank of Marin Bancorp in California paid down $28 million, Old National Bancorp in Evansville, Ind., paid back all $100 million, Signature Bank in New York repaid $120 million, and Iberiabank Corp. in Lafayette, La., paid back $90 million.

So we know the Treasury is accepting payment from these smaller regional banks. However, we do not know if the White House or the Treasury will accept repayment of TARP money by the nation’s biggest banks.

In a speech today, Goldman Sachs CEO Lloyd Blankfein once again indicated his desire to quickly pay back TARP. Jamie Dimon of JPMorgan has indicated a similar desire, as has BofA CEO Ken Lewis. But the Politico story implies that Obama does not want the big banks to pay down TARP, and that he is in effect telling the banks, “You haven’t taken your antibiotic over the full period to heal your illness.”

But most of the big bankers are saying they’re regaining profitability. This is especially the case since they can borrow short at near-zero interest rates and lend long at five or six years.

There is a suspicion that the Treasury will use its new bank stress tests to judge whether the big banks should pay back the government capital purchases. But no one knows whether these stress tests are truly standardized; why they are any different from the normal FDIC tests, or for that matter testing by the banks themselves; whether this is going to be a Treasury judgment call; or whether that Treasury judgment call in effect puts a gun to the collective head of the banks in order to force the banks to sell toxic assets through the Public-Private Investment Program.

Many in the government believe that if some banks pay the funds back and others do not, a scarlet-letter stigma will be attached to those who do not. And they believe that might cause a deposit flight, or even capital flight. But it can’t be healthy for the government to determine whether the banks themselves are healthy. And the public is so opposed to the TARP program, you would think paying back TARP in order to retire our over-the-top debt would be a good thing.

Meanwhile, at yesterday’s National Review Institute luncheon here in New York, Sen. Bob Corker told us that he suspected — merely a suspicion — that one or two big-bank CEOs would be removed by the Treasury within 60 days of the conclusion of the stress tests. This is what Treasury secretary Geithner hinted at on the recent Sunday talk shows. And that raises the question of whether a bank CEO-removal would be playing politics: Would it be to even things out after the removal of Rick Wagoner of GM — to placate the unions and their allies like Sen. Carl Levin of Michigan who are charging that the auto industry is getting much tougher treatment than the bank industry?

How to end the political direction of our banks? Let them get out from under TARP as soon as possible. Let them make their own decisions. Let’s end this sordid chapter of unprecedented government intervention in the market economy.