Yes, it is part of a balance. You don't want to shift all the power to the home buyer vs the lender. You also don't want to shift all the power to the lender vs the home buyer.
Take this extreme hypothetical example. Suppose a law is passed that states that lenders can't say no to a person with good credit - not for any reason at all. Power has shifted entirely to the buyer. What happens? People rush out and buy $100M homes with $50k incomes. One month later they are in foreclosure since they can't afford the $400k interest payment. That is a bad situation, things are out of balance. You can't give all the power to the people. They need to be protected from this clearly bad situation. The need to be protected from themselves, their own greed. Heck, even I'd do it to live in luxury for a few months without paying anything.
Same goes for the lenders. Put the reasonable limits on each and you get a fairly happy and fairly functional medium that is close to best for both.
That's not showing the need for protection.
A proper loan is done with credit, asset and income verification. The problem in the boom is banks allowed the stated-income/stated-asset loans. While these have a place for someone like say Bill Gates or Warren Buffet, they didn't have any place being used for a waiter at a TGI Fridays claiming $120k per year income and $200k in the bank.
People with good credit tend to keep that. Good credit is not just pure score, but number and length of tradelines as well as looking at current payments being paid now.
With income verification they show they have the mean to support that payment. Assets ensure that if things go south they can support themselves and property for a few months.
To me assets are more important than down payment.
20% is majorly excessive in some markets. 10% is a much more reasonable amount and enough at current home price levels to consider walking away.
People argue that they can't save and rent...I say they are looking at it the wrong way especially when if you look at their financial foot print they are tending to rent beyond their means to begin with and then went ahead with new cars and large bill payments to luxury items each month.
In the past people would pick a safe but smaller than ideal rental, forgo the family vacation, skip gift buying for a year or two and stretch their clothing / cars a bit until they put away some savings and a nice down payment.
There is too much entitlement view.
However, I don't need the government to protect me from myself. No one should. If one makes the mistake then they should live with it and that was the way it typically always has been.
The boom changed some of this as well-minded people (even those with 20-30% down) have been burned. I have read about people that have put 50% down and are still majorly upside down...it's something that should never have happened and those that truly did the more responsible thing are the ones most burned.