Thursday, December 9, 2010

This may actually be a good idea........

From HUD, "A consumer’s guide to owning a home with less
than three percent down".   Their web site here.

This story has been floating around several of my favorite blogs.  I
read it first at Mark Perry's Carpe DiemMark's post ends with
the question, "Isn't that exactly the same kind of mortgage
lending that helped cause the housing bubble?"

Low down payment VA and FHA loans have been around as long
as I've been in the business.  Not sure that there is a direct
connection to the "bubble". 

Relaxed loan standards, i.e. "liars' loans, and adjustable loans with
ridiculously low payments in the early years allowed people to
take on way more debt than they could ever hope to repay.
According to the mass hysteria of the bubble years, real estate
values not only  always went up, but they went up quickly.  With
this psychology in place, why not buy something you couldn't
afford.   It would be worth so much more in a few years that you
could sell it and make a killing before the payments adjusted. 
Ooops.

One of the benefits of the balloon burst is that houses are now
much more affordable.  They just cost less than they did five
years ago, sometimes a lot less. 

Here is an example from our market:   a four bedroom, three
bathroom, two story house with a full walk out basement, hot
and cold running water, and a two car attached garage was
mortgaged for over $250,000 in 2005.   It was foreclosed on in
2009 and recently re-sold for $165,000.

If the buyer has good credit and meets all of the other lending
standards that were in place in 1990, what would be wrong with
them taking out a 25 year fixed rate mortgage, borrowing 97%,
or $160,000, on this house?  The monthly payment would be
less than $1,000.

I suspect that the combination of lax lending standards, funky
adjustable mortgages gamed to make the debt load seem
affordable,  and the assumption that "no price was too high
because prices always go up", had  a lot more to do with the
collapse of the housing market than 3% down payments.

Of course, we like to buy things without any down payment,
so I might not be the best person to ask about this topic.

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