A battle is raging over arcane regulatory rules that may have significant impact on how much down payment a lender will require in the future. Wells Fargo has just  suggested to regulators that home buyers come in with a 30% down payment. What’s this all about?

In response to the financial meltdown caused in part by the easy credit policies which started in the sub-prime mortgage market, Congress last year passed the Dodd-Frank Wall Street Reform Act. Part of this bill requires that regulators establish policies for lenders who sell (“securitize”) their loans into the secondary market. In addition, to ensure that lenders now have some skin (risk) in the game, it requires they keep 5% (called risk retention) of those loans on their books.

But, and it’s a big but, regulators have a lot of latitude in making exceptions to the risk retention policy and it’s in their power to come up with a definition of a “qualified residential mortgage” (QRM). A QRM loan might be exempt from the risk retention requirement – that is, the lender doesn’t have to keep any of the risk; it call sell 100% of the loan into the secondary market.

A QRM must have features that minimize the risk of default, and this is where the regulatory definitions become important and Wells Fargo claims that a 30% down payment requirement eliminates the risk of default.

To this observer, it appears the pendulum has swung too far to the other side. The National Association of Realtors and other organizations are working hard to keep this onerous, little known regulatory battle from destroying the ability of millions to enjoy home ownership.