I think that the system for determining down payments and mortgage rates is probably okay. That market should be competitive – if a lender is demanding an unreasonable amount, a buyer can go somewhere else, same as any other market.

https://www.forbes.com/advisor/mortgages/how-many-mortgage-lenders-should-i-apply/

But how many mortgage lenders should you apply to? The Consumer Finance Protection Bureau (CFPB) recommends that you contact “at least three lenders” on your shortlist.

In such an environment, I’d expect that it’s hard for there to be collusion to artificially drive fees up. They’d have to have some way of preventing competing lenders from entering the market.

The down payment discourages a buyer from defaulting, so I suppose if lenders expect high down payments in a given situation, they expect a high risk of default. Maybe they assess the risk of the post-sale price falling as high, for example. Saying “I want 20% down” is the lender saying “I think the price might fall 20% and if so, I don’t want to be the one left holding the bag. You, the buyer, can eat the first 20% of price drop, and only after that will I start to be exposed.”

I think that if lenders are wary of lending to buy something without a large down payment, I might be wary of buying it too, as a potential buyer.

Might be interesting to see what the correlation is in historic spread in offered mortgage rates for various down payments with historic price movements of houses over some subsequent fixed period of time. If a lender can do a good job of predicting price movements, then one would expect them to have a higher down payment more-significantly reduce lending rates prior to situations where the price of the property falls.