Standard mortgage downpayments are 20%. The Federal Housing Finance Agency wants to underwrite mortgages for first time borrowers with strong credit histories with a downpayment as low as 3%.
The mortgage industry loves this. Those with memories of the subprime crisis from, oh, five years ago do not. Dean Baker drills down into a study by the Center for Responsible Lending and concludes that default rates are 80% higher for borrowers with downpayments in the 3-10% range. Kevin Drum reminds us that excessive leverage was the key culprit in the 2008 financial crisis. I say a great credit history won’t help you or your cohort if the economy goes south and you lose your job. A set of borrowers who pay their bills on time are still susceptible to system-wide collapse.
The FHA’s answer is that this program may not apply to too many people anyway. Hrm. Death by a thousand cuts, I suppose. ISTM that such marginal activity shouldn’t get federal guarantees.
At the very least, this program should have a sunset provision. The only justification I can think for this plan is that it will stimulate a weak economy. But that reasoning is losing its shelf life: forecasters believe the Fed will raise rates next year.
While I agree that 3% down is probably too low, if you put 20% down you’re not any better off if the economy goes south and you lose your job. Arguably, you’re worse off because if you’re foreclosed you stand to lose more money.
I’m a realtor. 3.5% down mortgages have been available through FHA for years. This new program is a conventional mortgage, underwritten by Fannie/Freddie, with 3% down. Hell, USDA rural programs have been offering ZERO percent down mortgages for years.
I don’t think this will change anything. The biggest part of the mortgage meltdown were sketchy ARMs and no document mortgages. ARMs are still out there, but lending guidelines are now harsher than they have been ever, so far as I can tell.
I haven’t had a chance to review the details of this plan (starts in March 2015), but it could help tremendously with getting foreclosures and vacant houses sold. FHA/USDA have a separate checklist which they use to approve safety and soundness of the homes they lend on. This is all a good thing, except they will reject a home for such small issues as lack of GFCI outlets near water (a $4.00 repair) or peeling paint/drywall holes. Conventional lenders write loans on houses, rejecting those that have serious issues (foundation, roof, etc.) but don’t care about the ticky tacky bullshit items - except they require anywhere from 10% down and up. If Fannie/Freddie don’t require the FHA/USDA guidelines, a lot more of the marginal homes will be sold - good homes that are sound but need to be painted or have some outlets switched.
How many years? 10 years? 15 years? If so, that was part of the problem. I have limited sympathy for an exception over the next couple of years, but that’s it. 27x or 32x leverage is nuts whether it be in Wall St or Springfield. And the OP backs that contention up with data.
As for rural programs, I assume they are part of our large but separate farmer subsidy habit.
Boyo Jim - also if you get hit by a bus you won’t be able to keep payments up. Serious medical issues will occur for a certain share of homeowners. But those risks are uncorrelated with the economy. The problem arises systemically when lots of mortgages go south at the same time (and when leverage is multiplied via securitization). This is the sort of thing that the Feds need to curb. I sort of agree with Sateryn76 that the no-doc issue was more egregious, but as far as we can tell recessions are triggered either by Fed tightening (possibly a necessary evil or not) or bubbles connected with excessive leverage. And the latter are nastier. It’s possible that reasonable and informed views on this could shift ten years on, but for now that’s my position.
FHA loan programs were started in the National Housing Act of 1934. The USDA programs have nothing really to do with farmers - they are used to encourage settlement in rural areas, and are generally used to buy perfectly ordinary non-farm homes on standard neighborhood lots.
You seem to have a lot invested in the idea that housing should be available only to people who can save up 20% or more. So, for example, in my county, average home prices are about $150,000, which is at least $30,000. Please tell me how many people you know who can save $30,000 by the time they’re, say, 35 years old. And their salaries.
Sateryn76, aren’t you conflating *housing *with home ownership?
Housing is available, and should be more available. But I’m not convinced that home ownership is really the be-all and end-all of the American Dream, despite what I’ve been taught these four decades. why should everybody be given a mortgage, regardless of their down payment?
(Not to mention that first-time buyers rarely buy at the median price. But you’re a Realtor, so you know that better than I.)
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Do you have even the slightest understanding of how a mortgage works? A 3% down mortgage does not mean you stand to lose less money than a 20% down mortgage, because if things go well, your 3% share will at some point hit 20% as you pay off the principal. If it takes you ten years to pay off that first 17%, then you are just as vulnerable in year eleven of the 3% mortgage as you would be in year one of the 20% mortgage.
I know exactly how it works, and I know exactly how foreclosure works, as I have a mortgage and the mortgage holder filed foreclosure papers on me after 3 years of unemployment. Luckily, I’m employed again and am out from under foreclosure.
My point was very simple. If you buy a 100,000 home today, and become unemployed sometime in the future, you’ll lose less money if you’ve put less into it. I understand this will change over time, as you’ll almost surely be paying a higher monthly amount because you’ve financed a bigger chunk of the cost.
I ran some numbers through a mortgage calculator. If your home is $100k and you put 20% down, at 5% apr you pay about $430 a month on a 30 year mortgage. Same deal with 3% down, you pay $520 a month. You’re “catching up” about a hundred bucks a month on a $17K difference. And I also know it’s not really that simple either, but it’s a not too far off for a rough approximation.
Just saying – if I was concerned about my job security, or the whole economy tanking in the next few years, or the real estate market bottoming out, I’d put down as little as I could get away with.
Correct - I should have said home ownership. And also correct re: the median price for first time buyers. I counsel my clients very carefully on budget concerns, etc. But there’s not a whole lot of difference, because it’s just as difficult for someone to afford 20% of a $80,000-$100,000, if that’s their price range. And once you get below $80,000 (in this area) you’re looking at homes that won’t go FHA due to those ticky-tacky “problems”.
That’s a misperception. First of all, we’re discussing Federal guarantees: I’m open to some wiggle room on the margin, but not on the government’s dime. Secondly, based on the data presented by Dean Baker, my cutoff was around 10%. Admittedly I haven’t dug into the numbers.
I also have some sympathy to the idea that the US over-emphasizes home ownership, but to the extent that is the case I would attack the home mortgage interest rate tax deduction and not the FHA.
I appreciate your insight in this thread though: there’s nothing like on the ground knowledge. I’d like to repeat my question though: how long have 3.5% down mortgages have been on tap by the FHA? During the 1930s for example I understand that downpayments were high, interest rates variable and terms short. [Cite: Green and Wachter: The American Mortgage in Historical and International Context]
Also, Robert C. Pozen of Brookings (2013) underlines some of the systemic problems with this policy: [INDENT] Dodd-Frank Act generally required mortgage lenders to retain some risk in the mortgages they sold. In specific, these lenders were required to retain 5% of the economic risk if they sold mortgages that later defaulted. At the same time, Congress was concerned that such a requirement would lower the volume of new home mortgages. So, Dodd-Frank established several broad exemptions to the risk retention requirement for mortgages that Congress believed were relatively safe.
In the future, the home mortgage market will be dominated by mortgages covered by these exemptions. Almost every firm will prefer to originate and sell these exempt mortgages, rather than retain some of the risk that non-exempt mortgages will later default.
First, Congress exempted from the risk retention requirement all mortgages insured by the Federal Housing Administration (FHA), which currently accounts for over 40% of the new mortgages in the US. These mortgages are issued by private lenders and then insured by the FHA if they meet certain criteria. But the FHA insures mortgages where the borrower makes a down payment of only 3.5% of the home’s value. So the FHA is insuring 100% of a mortgage where the lender retains no risk and the borrower has a very low down payment. For these and other reasons,** the default rate on FHA-insured mortgages has been rising and the FHA is now in serious financial trouble.**
[/INDENT] Emphasis added. This sort of subsidized risk taking needs to be cleaned up.
If everyone in America were required to save 20% of the cost of the house, and this had been policy for decades, houses would not be so overpriced. The costs paid would be more proportional to the legitimate costs of construction and the actual inherent value of the land. This is basic economics : because there’s a bunch of those 35 year olds who don’t have to come up with 20%, they can get huge loans with a smaller amount of money and a few signatures. That drives up real estate prices (too much money, too few goods, you know the drill).
I have this idea that in my parents day, a 35 year old was a full grown adult person who should have begun to buy a home by that point.
Misperception?
It seems we 35 year olds are regarded more as, at best, newly minted adults (if not simply very advanced adolescents), going by some comments I’ve seen elsewhere and in this thread.
I apologize in advance for this slight hijack, but it seemed better than starting a new thread:
Let’s say that I and my bank determine I can afford a $200k loan.
With 20% down on top of that, I can afford a $240k property.
With 0% down, I can afford a $200k property.
I understand that for the lender a down payment means more cash in hand up front, and/or a more pricey sale.
But, from the borrower’s perspective, it seems that the only benefits to a down payment are:
Maximize the value of the property I can afford to buy, or
Not paying interest on that 20% of the value of the property I pay for up front, the benefits to this weighed against my potential interest earnings on that money were I to save/invest it in something other than my property.
Am I missing something here? I often hear people say that it’s irresponsible to buy without a large down payment, but I’m not seeing the imperative. I think it’s probably wise to not over-extend one’s financial ability, but that doesn’t seem to be directly related to an arbitrary 20% down payment on a home loan.
Note, I’m not arguing that down payments are unwise, or that there aren’t a myriad of times/reasons why they are the right choice for borrowers, just that there’s nothing inherently wrong with not having a down payment, or having a lower down payment.
For starters, this is clearly wrong. If you can afford a $240k, 16.66% down property, that means that you can afford a $200k loan and you have $40k in cash. That cash doesn’t vanish just because you’re not spending it on a mandatory down-payment.
For the lender, it suggests you have sufficient self-restraint and stability of income to save $40,000, and you have more skin in the game, all of which means you’re less likely to default on your loan and are less of a risk to lend to.
The borrower would prefer a loan with no mandatory down-payment, but only the same way they might prefer a credit card with no credit limit. It is stupid to offer someone a credit card with no credit limit, and it is just as stupid to offer them a 3% down home loan.
Never having taken a mortgage, I welcome the correction. The % down is on the value of the property, not the value of the loan. Still, I think my point remains, no? I have the ability to carry a loan of a certain amount (in this example, $200k) . . . what money I want to spend in addition to that amount has nothing to do with what amount I can afford to borrow.
Yep, I agree, though I didn’t include this. There are all sorts of reasons a lender would view a down payment as a good thing, security-wise.
Right.
But my question is, from a borrower’s perspective why is a large down payment important? yellowjacketcoder just said: “I didn’t even consider buying a house unless I could put 20% down. I wanted to put 30% down but my wife was worried about the rainy day fund.”
I’m trying to understand why, as a borrower, putting a large percent down is meaningful. If there are financial incentives from your lender to do so, then I get it, but on the face of it, I see no moral or financial reasons to want to pay a large down payment.
You avoid PMI (mortgage insurance) so your loan is cheaper long term
You pay down the principle early, so you pay less in interest long term
The interest rate you can get will be lower because you’re a lower risk, so you pay less in interest long term
If you have to move, you don’t have to worry so much about making sure you sell your house for enough to cover the loan. If the house value went down, say, 5%, you sell the house, pay off the loan, and have some leftover (sure, you have taken a loss). If you only put in 3% and the house value went down 5%, you sell the house and still have 2% to pay off. Much worse situation to be in.
If the worst case happens and you get foreclosed on, you’re much more likely that the fire sale price the bank will give with cover the mortgage and not leave you with residual debt and no house to show for it.
If you can afford to spend $40k and borrow $200k, that automatically means (barring higher interest rates and the like) you can afford to borrow $240k and pay off the first $40k immediately.
It’s not, but it’s not supposed to be. Refusing to guarantee home loans below 20% is for the government’s benefit, so that lenders can’t make stupid loans knowing that the government will catch them when it all goes to hell.
The simple reason for the down payment is that if the mortgage market shifts, you have less of an incentive to walk away. It reduces the cascading failures that happened in 2008. You the buyer do not get any benefit other than a more stable marketplace means you face less risk when it comes time for you to sell.
Last year New Zealand’s reserve bank imposed a Loan-to-Value restriction on new mortgages (basically requiring 20% down for all new home buyers). This short explanationas to why from the Reserve Bank governor is a nice, clear explanation as to why this was done. Makes sense to me as a New Zealand taxpayer…
