If 20% down was required, home prices would reflect the ability of those living in the area to pay said down payment. Otherwise, there is no need to build.
Just a thought from a slightly different perspective.
Why is the number 20%, and not 10% or 30%?
I would disagree with a flat-out requirement of 20% down. Y'all are overlooking the fact that each homeowner, each borrower is different.
The downpayment requirement is there for one reason, and one reason only: to provide some security in the event that the value of the house drops during the initial part of the loan term _ AND _ the purchaser doesn't have the ability to repay. If the downpayment is zero but the purchaser can repay, then the loan is safe (provided, of course, that the purchaser has the morals to fulfill their obligation). If the downpayment is 30%, and the purchaser can't repay, then you've got an issue.
As Tim points out, many area have constricted housing markets that tend to keep market values high (and less likely to drop). Thus, those markets have a greater security that values won't drop - in the DC area the area inside the Beltway has held up quite well in home values, while those areas far out have dropped like a rock.
A prudent risk analysis would say that 10% (or even 5%) is sufficient inside the Beltway, while 30% in the areas in Prince William and Prince Georges County would not be.
The issue here is "ability to repay". And that needs to be addressed through risk pricing of the loan (IOW, more income, more docs, higher down payment, lower interest rate). Had risk-pricing been taken into account in the current situation, a lot of the subprime folks would not have been able to purchase, but flexible down payments, etc. would still be available for qualified folks.
Let's look at another case: one of our own has asked a question in another thread about qualifying for a mortgage when moving and taking a new job. Would you cut him off because he doesn't have 2 years at the new job for verification of income, plus a 20% down payment (maybe he's got 15% after paying brokerage fees for selling the old home)? Let's say he has a sterling record of payments where he is now, a high credit score, good employment history, etc. If one puts arbitrary criteria into the law, then it cuts a well qualified person (with high moral responsibility for repayment) out of the system. Sorta like having the FAA impose a new regulation (as a matter of mandate) that you can't take off unless the ceilings are MVFR, even if you're on an IFR flight plan. Or having the FAA mandate the Wings program for a BFR.
The problem here, as I see it, is that the concept of risk management and risk pricing went out the window. The folks responsible for assessing risk didn't care because they 1) sold the loans in a package, or 2) because they were "protected" by derivatives. The folks buying the crap didn't know the real risk (or didn't care because of the high return).
Risk management.