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Nothing-down mortgages are back
A no- or low-money-down mortgage is dangerous for the borrower, the lender, and, if enough of these loans are made, for the economy as a whole.
I really thought it would take longer than this.
If you have been reading this blog for a while, you know that I am generally skeptical of the proposition that we will learn much of anything from the Great Recession. My assumption has long been that given five or 10 years we will be the same bunch of ignorant fools we always were, doing the same foolish things.
But I did think that in the shorter term -- this year and next -- some of the more obviously foolish stuff would be avoided. I didn't think anybody would be willing to invest in GM in 2010. And I didn't think that anybody would be discussing taking out new no-money-down mortgages anytime soon. I was wrong on both counts. Post continues after video.
Recently, Bankrate.com ran, and outlets such as Yahoo and MSN Money carried, a helpful article: "4 mortgages that require little money down." It was a roundup of several, mostly government-sponsored programs that will loan a person virtually or actually all the money they need to buy a house. Truly a trip down memory lane.
An optimist might have thought that with the government's fiscal problems and the debacle of Fannie and Freddie still an unresolved open sore, the feds might be a little gun-shy about writing and/or guaranteeing mortgages of any kind just now, never mind the more dangerous types.
Alas, no. The VA is still happily helping veterans borrow up to their eyeballs. Because those who have served our country in harm's way deserve to get loans the private sector worries they can't pay back.
The Department of Agriculture has a popular program to guarantee mortgages in rural areas. Their definition of rural is accommodatingly expansive. From looking at Eastern Massachusetts on their helpful map, I infer that anyplace you need a car to get to the store counts.
The FHA, which during the good old days of the housing boom insured 3% of mortgages, has quietly become a market leader. They now cover 30% of borrowers. Of course, they are not so crazy as to finance the entire purchase. They require a 3.5% down payment. That's up from 3% two years ago.
And Bankrate did not even list all the high-leverage options. From the Boston Globe's Boston Real Estate Now blog we heard last week about a new program from de facto federal agency Fannie Mae called Affordable Advantage.
The new initiative lets qualified, lower-income buyers with good credit get a mortgage without even having to meet the already low, 3.5% down required on most federally backed mortgage loans.
Instead, these lucky few are eligible for 100% loan to value mortgages. In some cases a token down payment, such as $1,000, is required.
And it is not just the government that has rediscovered the joys of inadequate capitalization. Remember private mortgage insurance, known to its friends as PMI? After a too-short hiatus, it's back. From Bankrate:
PMI has become easier to get. From the start of the housing bust until just recently, mortgage insurers slapped a "declining market" label on the worst-hit housing markets and required minimum down payments of 10% or more, instead of the traditional minimum of 5%.
We have now returned to the traditional state of things, wherein homebuyers anywhere in the country can pay an immodest fee and put only 5% down on a house.
I am hoping that the housing bust is recent enough that I do not need to go into great detail about how bad an idea this is. A no- or low-money-down mortgage is dangerous for the borrower, the lender, and, if enough of these loans are made, for the economy as a whole. And don't get me started on our tax dollars being wasted.
Again, I am surprised only at the timing, not at the fact that 95%-plus financing is back. We are a naturally optimistic people with a very selective memory. But you might think that less than two years after the mortgage apocalypse, a how-to on buying with very little down might more directly discuss some recent problems with the practice. Granted, Bankrate.com is in the business of selling ads to lenders, so it is naturally biased in favor of borrowing money. Still, little in the piece hints that no/low-down payment mortgages might be dangerous for some borrowers. (The tone of the Globe's post, on the other hand, is appropriately alarmed.)
I now predict that we are only months, maybe weeks, from seeing cheerful items in the mainstream media about how you can live the American dream of homeownership with little or no down payment. Which means that we are only eight to 10 years from seeing articles about how bad an idea it was.
As a real estate investor and property tax consultant with more than 20 years experience in the field - I can tell you that there is still an important difference between borrowing now and borrowing a few years ago. Today a buyer actually needs to have at least decent credit it order to qualify for a loan. We are not seeing any illegal aliens with $17,0000 incomes buying $500,000 homes or people being able to obtain 5 different lines of credit against their home. A few years ago anyone breathing could obtain a mortgage of some kind. That is no longer the case. Hopefully it will never be again - at least not in my lifetime.
This article was written by Curmudgeon - which means a surly person. I have two no-money down loans and own three properties. Never missed a payment. Take a lesson from the self-made millionaires and not the sophomoric journalist who wrote this article. The best money is other peoples' (OPM). Leverage as much as you can afford and build your wealth thru OPM, or continue to be an employee for someone else.
PS: Looks like FHA now self-insures their Mortgage Insurance, charging .5% like PMI does (.55% extra if less than 5% down). So the question is whether the FHA is enforcing any strict requirements on applicants. Probably not, since politics gets into the mix.
Personally, in the current economy it's probably better to require that someone is capable of saving for a down payment, rather than offering this. It's also probably cheaper right now to rent an equivalent house than buy one. I doubt anyone is explaining this to the applicants.
What's the shocker? I'm watching a deal put together by a 'successful' Realtor who claims to be acting as an Intermediary (loyalty to the sale, not either Buyer or Seller). She's convinced the Seller that the Seller needs to concede $5K to the Buyer so the Buyer has the necessary down payment to close the sale. Broker insisted that this is 'the way it's always done' in that market, and a review of sales in that area appears to support that statement! The result . . . a whole new group of Buyers who can't make their mortgage payments, another round of foreclosures and home values increased by the amount Sellers concede, just to make the sale.
Anyone else see where this is headed?
Like Fleckenstine said, all we had was a real estate based economy, and they are trying to resurrect it. They are going to do everything under the sun to try to get the housing market booming again. Why doesn't the FED just start making home loans for the same rate they give banks? The government is going to own all the houses that foreclose anyhow.
Can we allow stock market gambling with no money down too? And let me deduct the interest on the margin loan, and let the first 500,000 in capital gains be tax free...
Thought not... sounds like the FED is trying to open the casino again... Wanna Bet the Democrats are behind this?