I mentioned in an earlier post that it matters almost nothing whether someone puts down 5% or 20% on a mortgage — down payment doesn’t affect performance. A coupla folks were tempted to call shenanigans and wanted to know the source.

I had heard this at NAR’s mid-year conference from an NAR speaker, but that’s really not good enough. So here’s the detail. It comes from a piece on REALTOR magazine’s Speaking of Real Estate blog by Robert Freedman, and the data come from the Community Mortgage Banking Project:

In an analysis of the performance of loans made between 2002 and 2008, loans on which the down payment is increased from 5 percent to 10 percent showed improvement of between 0.1 percent and 0.5 percent. No, those aren’t typos. The gains are that small.

There was a little bit better improvement when down payments were increased from 5 percent to 20 percent. Performance improved between 0.3 percent and 1.6 percent.

That 1.6% was in 2007. In every other year from 2002 through 2008, the reduction in default rate from a 5% down payment to a 20% down payment was between 0.3% (2003) and 0.8% (2005-2006). Requiring a 20% down payment instead of 5% will reduce defaults by less than one percent.

What, you want me to draw you a picture?

And vice-versa

How about the other way around, since we’re looking at real numbers? If someone defaults on their mortgage, how bad a credit risk does that make him?

The answer comes from TransUnion, via a HousingWire story, “Mortgage defaults do not predict poor credit behavior“:

Consumers who default on other bills and lines of credit, such as credit cards and auto loans, are more likely to miss payments in the future. The results are meant to be used by lenders to help determine which kind of lender is better apt to handle more credit.

The report found borrowers who had mortgage-only defaults on their records performed far better when they took out new loans when compared to borrowers who defaulted on multiple lines of credit.

So there you have it, federal regulators. Requiring a 20% down payment for qualified residential mortgages will clobber the mortgage and housing markets, and all for naught.