Today's Sunday a.m. reading comes to us courtesy of the NY Times and their stellar regular columnist, Gretchen Morgenson. Her article is entitled
Some Bankers Never Learn and it's about the (new, not-so-improved) rise of risky low-down loans. Title and above should link. Ms. Morgenson talks about the Dodd-Frank bill and what it would mean to the mortgage market. My favorite quote: "Basically, Wall Street would have to eat a bit of its own cooking." The columnist comes out squarely on the side of requiring all mortgage loans to have 20% down.
Although it sounds great in theory, and I love Morgenson to pieces, I need to differ with her on this. Where are people supposed to get that 20%? Considering the economic client of the last few years, how would it be possible for any middle-class person to have saved that much unless they happen to be employed in a very few select industries? Or have tapped the Bank of Mom and Dad? Yes, zero-down loans are risky -- but can't we compromise and go with 5% down loans? Unless we want to see our markets tank again?
Very habitually I visit this site. It very much is satisfying to me.
ReplyDelete20% down would prove financial maturity along with discipline in budget which might improve the odds of completing the loan. Would also mean people would have some skin in the game and defaulting would not be as painless. It would also most likely bring prices in line with incomes. Where prices are 3-4 times median income saving 20% of that is not that large of a task.
ReplyDeleteI'm not completely against 3%-5% down loans, but only in very isolated cases. Not as a method to get someone in a home that otherwise they could not afford.
TonyM
Tony, you're right. As is Ms. Morgenson. But you're right in a perfect world, which it isn't. I can count on two fingers the number of buyers that I've talked with in the last two months that have managed to save 20%.* And it's not that they're spendthrifts -- they just have bills like housing, student loans, medical insurance (off topic, my husband and I pay more for med ins. than we do for our mortgage or our state taxes), kids' schooling, etc.
ReplyDeleteAdditionally, I think the 20% requirement would tank the current market. Perhaps worse yet, it would become a rich person's market, with most middle-class totally priced out, at least for several years.
I don't think the problem is 20%. I think the problem is mortgage lenders that didn't bother to check borrowers' credit worthiness.
*Except for the all cash buyers -- now, where did THAT money come from?
Well if the buyer has all these bills and expenses, then maybe they should rent until they get out of debt. Renting is cheaper.
ReplyDeleteRealtors of course are going to say buy. Just like a used car salesperson would say buy.
How would it become a rich person's market? If people are required to have 20% down and no one can afford that, then prices will have to come down to compensate.
ReplyDeleteWe had 20% down loans for many years before the current social engineering, and the market did just fine.
5% down loans will just lead to another bubble. There is no good reason our government should guarantee loans that banks would not make without the guarantee. It's not good policy.
Let's see.. 3 parties want higher prices: the govt (for property taxes), wall st (to maintain their asset values at artificial highs and stay solvent) and Realtors (6% rip off fee).
ReplyDeleteGuess who is on the other side getting screwed by all these 3 parties?
The simple fact is that home prices have been artificially inflated for a long time and need to revert to their 3x avg income target for this to make sense for end users. This would allow the average homeowner to spend no more than 30% of their income on housing so they can actually pay their other expenses, like you know, food and education.
The 20% down mandate is vital to bringing prices back down to their normal ranges. Eliminating subsidies for mortgages and limiting Freddie/Fannie loans to the limit of 417K would all help as well.
Sorry, but your position is clearly self-serving and harms consumers, even if you don't mean it to be.
I really appreciate everybody commenting. Most of you are talking about what should be, and you're right. That IS what should be happening.
ReplyDeleteI'm talking about what IS. Boots on the ground, and all that. And speaking of being self-serving, which I am, I sure don't want to lose what equity I've built up in the home we own -- and that's what'll happen if 20% is mandated.
Again, there's a simple way for us both to be right: have the bank check potential buyers' ability to pay back loans. Now. Then, it really wouldn't matter if the downpayment was low, would it?
It would still matter. If prices continue to drop(which they would since sales would continue to slow as bad risk people are still people removed from the market), strategic default becomes more appealing.
ReplyDeleteStrategic default is much less appealing if one has skin in the game, and I'll note that 20% skin in the game in Burbank generally means $100K or more. Fewer people are willing to walk when they have that much involved.
Folks, we'll just have to agree to disagree. TonyM and other posters, I appreciate your reasoned responses. Thanks for commenting.
ReplyDelete