Down payment requirements, for mortgage loan programs, have increased over the past 12-18 months. Here are some examples:
- FHA hiked the statutory down payment to 3.5%
- Piggy-back mortgages, using second liens, are all but dead. Conventional loans, with down payments of less than 20%, require private mortgage insurance (PMI). PMI companies have hiked down payment requirements.
- State loan programs, like the CalSTRS loan program, suspended “no-down” programs
- Jumbo loans require hefty down payments
The larger down payment requirements were implemented to “limit loss exposure” to the lenders and guaranteeing agencies/insurers. That’s good right? Well, not necessarily good for you, the borrower. Low down payment loans, while more expensive, help to limit buyer losses in a down market. Low down payment loans transfer market risk from the borrower to the lending institution; it makes the borrower “too big too fail”.
That’s EXACTLY what these big banks and brokerage firms did; they borrowed so much that they became “too big to fail”. Former Labor Secretary, Robert Reich, outlines the conundrum we face by consolidating the companies who were “too big to fail” into larger institutions that are…REALLY “too big to fail”.
What’s that mean to you, the would-be home buyer?
You never want to borrow money you can’t afford to pay back…BUT…a low down payment loan just might give you some insurance against a declining real estate market. It gives you LEVERAGE with the lender when things get…a bit dicey.
Why do banks rush defaulted loans, against homes with lots of equity, to foreclosure while they are more apt to “negotiate” a loan modification with a delinquent borrower who is “underwater? Banks have to deposit a “loan-loss reserve”, with the FDIC, when mortgages become delinquent. If the prospect of recovery is slim, some banks simply “write-off the loan” (to avoid that deposit with the FDIC) with hopes that they’ll recover SOMETHING later.
If higher downpayments “protect the lender” against market risk, it is only logical that the market risk is transferred to…the borrower.
That’s you.
Perhaps it will help some agents and their buyers and sellers to understand why good offers on short sales are rejected in favor of foreclosures.
There are a lot more players in these games than just the lender and borrower.
Brian - great post and good insight from the comment from Lenn. It is a tricky world out there... navigating through it can be a little crazy.
I think down payment all depends on the person's situation but am happy that the days of 100% loans are gone - that is a big part of our current problem
Brian I never really thought about this banks rushing to foreclose on homes with equity but I guess that would make sense. I know a couple of people that are getting by with late payments on their mortgages and the banks are working with them but in both cases there is negative equity.
When we bought our first home we saved for seven years for a downpayment. I know that kind of deffered gratification is un American but it has worked well for us just the same.
Your point of view makes sense. Banks do crazy things that are not often to the benefit of the consumer. I agree with Randall - glad those 100% loans are gone!
Brian, this is not surprising. I have seen some homes that when you look at what is posted in the Washtenaw County Legal News, I know the area, know what is owed and think, "Why are they not selling?"
This makes since from the banks perspective, but what about home owners and some Realtors homes being foreclosed on without trying to sell.
I learn alot from that little paper I get weekly.
From the borrowers point of view, it just makes sense to put down as little as possible. You are much more protected on the down side when you have bigger debt.
100% loans being gone is a good thing but what about those with super credit and not enough for the bigger down payments.
Brian: Great post. In our Military Market it is great that we have 100% VA Loans as many don't have money to put down.
Brian.... makes sense.. but aren't there different laws in different states to when a bank can foreclose on that borrower?
Great explanation of the balance of risk.
I know that kind of deffered gratification is un American but it has worked well for us just the same.
Delayed gratification is one of the key components to wealth, Teresa- it's worked for you because you understand that. You're starting to sound like a Libertarian :)
Lots of people commenting how 100% loans caused this crisis; that's just not accurate. Shoddy underwriting caused this crisis through abuse of stated income loans.When we reached the tippingpoint of affordability, the concept of compunction became an economic disadvantage and started us on this slippery slope.
I am not advocating 100% loans to serve the adolescent culture of consumerism that permeated our society. I only suggest that low downpayment options be used as a financial planning tool to mitigate market riskmwhile building liquid wealth.
Brian-
Thanks for the post. Great insight from an experienced professional.
aren't there different laws in different states to when a bank can foreclose on that borrower
Definitely, Jeff but I don't think that home equity is a litmus test for when the process can be started.
Let me give you an example. Loan me $500 with Phillies 2010 playoff tickets as collateral. If the Phillies are in third place, next Labor Day, you'd be less inclined to "seize" the collateral and more inclined to accept $300 in repayment of that loan. If the Phils were up by 10 games, you'd probably tell me to forget the loan and keep the tickets...unless it was 1964
Brian, Many people can't get around the fact that money is a commodity and when a bank rushes to a foreclosure or won't work out a short sale they are looking out for their bottom line. I have received REO listings that were foreclosed as fast as legally possible and others were ignored for a year after NOD was filed. It's all about risk and who is going to carry the bulk of the risk.
Great explanation of the balance of risk.
I clicked through to read about you, Mark because of your location (and profession). A Texas rancher will completely understand this because ranching and oil were built by "big bettors". The Texas oil man's mantra was to make the banks his partner rather than his creditor. They did that by borrowing as much as they could against the collateral so that they became "too big to fail"
The Texas HomeStead Act was initiated not to "protect Momma's home from Daddy's gambling ways"; it was to protect the banks from loss due to market fluctuations.
PS: Mark, I'm not "geographically biased". California developers and builders "took that lesson" from the old Texas oil men. We can learn a lot from those "big Texas bettors".
Happy Valentine's Day Brian. I wish you were on my site!
The MOST of my business is second homes and PMI seems to have all but disappeared for these buyers even with rather good credit scores. Just had a buyer with just under 720 who could not get PMI, fortunately they had the 20 percent down and are still buyers. Not many of my buyers have that 20 percent, but they are going to have to have it or have VERY high scores.
Brian Brady- America's #1 Mortgage Broker-With the amount of inventory on the market these days due to some home owners who couldn't afford their house in the first place,it makes sense to make lenders require more down payment from home buyers. It helps limit the banks to limit lose on their end just in case the buyer defaults on the loan. Have a great weekend Brian. Great post.
With the correct underwriting standards (full-doc, economically practical DTI's, 680+ FICOS, couple months in reserves etc), I'd love to see 103% LTV's on Purchases- to allow for closing costs. This would really loosen a tight maket and transfer debt from the non-performing to performing column.
Banks are hoarding every last bailout dollar to insulate against total failure...they have no risk tolerance, the hangover effect from 4 years of Studio 54 style financial debauchery. At some point banks will need to understand that they provided the pitchforks with which consumers and professionals stuck themselves, and look at how to start lending practically again...rather than seize up and 'try not to die'.
This was a wonderful breakdown of the risks banks take
At some point we may get back to "investor grade" loans, but for now it is a much safer lending environment for the banks to require larger down payments. This is really just getting back to basics.
Great info -- I think I"m going to need to "re-blog" this one!
Thanks for all the good information. To think as old men we will be able to tell our grandkids we remember a time when you didn't have to have money to buy a house. Will that be the good old days?
I think 5% down should be the minimum.
Brian - Thanks for posting and linking in the supporting information. You taught me few things.
I think 5% down should be the minimum.
Why?
I think putting money down does not make it any less of a risk unless it was like 20%. I have seen almost as many walk away with 5% down as 0. I think it is more a moral thing than anything else. We have made it too easy to just walk away from our responsibilities, whether a house, a marriage, car or kids everything is disposable nowadays.
I think that loan originators have an enormous responsibility to do their best to determine the right mortgage for their client. If a young soldier is promotable and will be receiving more income in the near future and needs 100% financing to purchase a home, then a no money down program is ideal loan program for them. As long as they are confident that they will be able to afford the mortgage payment now and in the future I think that there is no problem with borrowing 102.15% of the value. The abuse of the loose guidelines was the problem... greed. Most of those LO's are out of the business by now.