Tiny down payments for home mortgages are back

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animule
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Tiny down payments for home mortgages are back

Post by animule »

Down payments for new mortgages are creeping down. Check out the growth in the number of home mortgages that have less than 20% down.

http://www.usatoday.com/story/money/bus ... n/2075095/
In another sign of the housing market's brightening outlook, more home buyers are discovering conventional loans with down payments well below the 20% or higher levels of recent years.
Loans with down payments between 5% and 10% accounted for almost a fifth of the conventional loan offers that lenders made on the Lending Tree online exchange in the first quarter, according to Lending Tree.
That's up from just 6% of conventional loan offers in last year's first quarter and only 1% of the offers in 2011's first three months.
A similar trend shows up on the Zillow Mortgage Marketplace. The number of lenders quoting non-FHA loans with down payments of 5%-10% is almost double what it was two years ago, Zillow says.
This did not end well when this happened in 2005, 2006 and 2007. It's a warning that things are getting too frothy.
Cuzz35
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Re: Tiny down payments for home mortgages are back

Post by Cuzz35 »

Had a good friend pull the trigger with only 5% down. He's paying PMI now along with 2 new car loans that he stretched out to 72 months. Makes me sad. I made him an awesome spreadsheet based on information he gave me that showed he could have both cars paid off and 20% down in the house in only 4 years. Now he'll be paying on all the loans and PMI. I'm sure there isn't much to worry about because they both have steady jobs but I know it would leave a sick feeling in my stomach if I were in his shoes.
Calm Man
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Re: Tiny down payments for home mortgages are back

Post by Calm Man »

It is hard for me to believe that we have learned nothing from what happened such a short time ago. So in 5 years, here we go again with the foreclosures, bankruptcies, etc. And it is so easily avoidable. What a shame.
Topic Author
animule
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Re: Tiny down payments for home mortgages are back

Post by animule »

No money down mortages are also making a comeback...

http://www.cutimes.com/2013/03/27/no-mo ... ack?ref=hp
Two credit unions, NASA Federal Credit Union and Navy Federal Credit Union, are offering members mortgages without requiring any down payment or mortgage insurance.
Bill White, vice president of residential lending at the 84,000-member $1.2 billion NASA Federal Credit Union, declined to say what percentage of the credit union’s housing finance lending did not require a down payment. But he said that the volume in such loans was in the millions of dollars. The credit union booked $170 million in housing finance loans in 2012, White reported.
Because no money down loans cannot be sold on the secondary market, the credit union’s no down payment offerings are destined for its own portfolio.
Credit unions sidestepped much of the damage during the "Great Recession." Maybe missing out on the carnage has given some of them a false sense of confidence.
otbricki
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Re: Tiny down payments for home mortgages are back

Post by otbricki »

animule wrote: Credit unions sidestepped much of the damage during the "Great Recession." Maybe missing out on the carnage has given some of them a false sense of confidence.
I suspect the credit unions are selling the mortgages to the agencies who are then packaging up MBS's to feed into the Fed's QE program.

http://articles.marketwatch.com/2013-03 ... s-issuance

As a result the CU's shouldn't have any skin in the game.

I wonder who the counterparty is on the MBS insurance. They would be the ones to short.
littleken
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Re: Tiny down payments for home mortgages are back

Post by littleken »

The government remains to be the biggest problem. The low down payment loans are mostly from FHA loans, conforming loans, VA loans, and USDA loans. FHA requires just 3.5% down payment; Fannie Mae at 3%; Freddie Mac at 5%. It is one thing when businesses get into trouble in a free market; it is another thing when government is the driver of the problem.
It is sad that the politicians and the Ben Bernanke have learned nothing from the economic crisis just a couple of years ago. They try to create the same bubble again with low interest rate and close to zero down payments.
The only positive thing right now is that it is not easy to create the same bubble that just happen a couple of years ago, so we will see whether the politicians and the Fed's stupid policies can create the same bubble.
bhughes1001
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Re: Tiny down payments for home mortgages are back

Post by bhughes1001 »

We looked at buying a house here in Northern CA off and on for the last six months.
We heard some disturbing things from realtors that indicated people are abandoning common sense to chase quickly escalating prices here.

These gems included suggesting we abandon the financing contingency since the buyer likely wouldn't consider an offer with one, and the nugget that many buyers are bidding up prices and using 401k loans to make up the extra cash required.

We are still happily renting.

BH
countofmc
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Re: Tiny down payments for home mortgages are back

Post by countofmc »

Moral Hazard. People saw how easily you can just walk away from an underwater home in the last crisis, so why not? Pocket the gains, dump the losses on your fellow taxpayer.

Someone I know bought a condo during the height of the boom, saw the value decline by about 70%, so just did a "strategic foreclosure" although he could easily pay for the mortgage and then some. Before it hit his credit, he purchased a new home with another mortgage. In between, he lived in his condo for free because he decided to stop paying the mortgage. His new home has appreciated about 10-15% since he purchased. Dude is laughing all the way to the bank. And guess what? If the market tanks again, he'll have no qualms about doing the exact same thing probably.
billern
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Re: Tiny down payments for home mortgages are back

Post by billern »

bhughes1001 wrote:We looked at buying a house here in Northern CA off and on for the last six months.
We heard some disturbing things from realtors that indicated people are abandoning common sense to chase quickly escalating prices here.

These gems included suggesting we abandon the financing contingency since the buyer likely wouldn't consider an offer with one, and the nugget that many buyers are bidding up prices and using 401k loans to make up the extra cash required.

We are still happily renting.

BH
Yeah. I'm in Northern CA too and it feels like the low interest rates and low inventory may be creating a distorted market / frenzy.

I'd like to buy a house but the conditions make me feel unsettled. I'm more comfortable with my 100% equity allocation than with the thought of buying a home based upon current prices.
money
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Re: Tiny down payments for home mortgages are back

Post by money »

I am hearing about real estate being hot as well in northern CA from family and colleagues. Dozens of offers and $900+k on fixer-uppers. I do not understand how the market prices remained relatively high during the past 5 years. It is frustrating since I ideally would like to own my own home, but the prices just do not make sense. I am also hearing about speculation on investing in real estate as being able to get a steady return on their investment. Having interest rates so low seems to be fueling this activity as well as other areas in the market. :annoyed
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kenyan
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Re: Tiny down payments for home mortgages are back

Post by kenyan »

money wrote: I do not understand how the market prices remained relatively high during the past 5 years.
The constantly declining interest rates were a strong enabler of this. Required monthly payments, which determine what most people can afford in high-cost areas, declined quite a bit, but the various efforts to drop long-term interest rates were successful in mitigating this drop's effect on prices.

30-year fixed rates dropped from ~6.5% to ~3.5% over the past 5 years. That means $750K P+I mortgage payment would drop from $4740 to $3370.

There are many other considerations, but this effect was huge in propping up prices that easily could've/should've dropped further.
Retirement investing is a marathon.
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Ketawa
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Re: Tiny down payments for home mortgages are back

Post by Ketawa »

Count me in as one of those foolhardy home buyers who's only putting 10% down! I'm getting a 5/5 ARM from Navy Federal with a 3.00% interest rate, 0.25% in points, $2500 rebate towards closing costs, and no need to go the VA or FHA route.

If anything, home prices in the area I'm looking have been flat the last two years.

Of course, I'm a responsible Boglehead who plans to prepay aggressively before investing in a taxable account.
investingdad
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Re: Tiny down payments for home mortgages are back

Post by investingdad »

They never went away.

When we sold our house in 2010 the buyers only put down 5% and they needed us to assist on closing costs. After they got done rolling in other closing costs with their mortgage, they were upside down from the outset.
NOLA
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Re: Tiny down payments for home mortgages are back

Post by NOLA »

Sad if it gets bad again, however I don't think it will get close to the 2008-2009 levels again. Sure, there are people that use the system like an earlier poster mention. Nevertheless, you need a much higher credit score to get a loan today. And although its not a perfect system, its much better then it was 5 years ago. When I worked in the mortgage business, I saw people getting loans with 0% down and this was people I wouldn't lend $5 of my own money to. So it won't be as bad unless they lower the standards quite a bit.
bill88
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Re: Tiny down payments for home mortgages are back

Post by bill88 »

I just don't see an increase in the availability of 5 to 10% down mortgages as a wholesale invitation to moral hazard.

Not everyone's a chiseler. Or a high roller. Young people starting out, for instance, might need the 'leg up' that a 5% down mortgage provides. It certainly helped us 40 years ago when we bought our first home with a $2,500 down payment. And, as other posters have mentioned, most lenders today are a bit fussier about good credit than they might have been in 2006. Besides, we need to encourage first-time home buyers. Otherwise, who will buy our third-time homes when we're ready to sell? :)

Cheers,
Bill
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irwinmfletcher
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Re: Tiny down payments for home mortgages are back

Post by irwinmfletcher »

sounds great to me for a couple of reasons:

1. for those on the sidelines, another potential housing bust sounds appetizing. I still think homes are about 25% overvalued (compared to renting) in my area.
2. if I were to buy I would prefer to put 0% down. In my perfect world, if I could find a 3% fixed rate mortgage with no money down and 50 year term (100 would be even better) I would take that 7 days a week and twice on Sunday. No prepayment penalty of course!
Topic Author
animule
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Re: Tiny down payments for home mortgages are back

Post by animule »

bill88 wrote:I just don't see an increase in the availability of 5 to 10% down mortgages as a wholesale invitation to moral hazard.

Not everyone's a chiseler. Or a high roller. Young people starting out, for instance, might need the 'leg up' that a 5% down mortgage provides. It certainly helped us 40 years ago when we bought our first home with a $2,500 down payment. And, as other posters have mentioned, most lenders today are a bit fussier about good credit than they might have been in 2006. Besides, we need to encourage first-time home buyers. Otherwise, who will buy our third-time homes when we're ready to sell? :)

Cheers,
Bill
Bill, the problem with small down payments is that even a modest move down turns a buyer "upside down" and increases the odds of a strategic (or non-strategic) default. This trend marks the movement of weaker, and poorer quality buyers into the market, and it's hard to see the upside of that.

It's interesting that Canada has different rules, and recently made changes to avoid problems by shortening the length of mortgages and changing the maximum percentage that can be financed.

http://www.bloomberg.com/news/2012-06-2 ... le-1-.html
sls239
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Re: Tiny down payments for home mortgages are back

Post by sls239 »

The people supposedly buying our house have a tiny down payment and are getting closing costs paid. But it's hard to care when you're the seller.

And it isn't just first time home buyers who benefit from low down payments - our buyer had to sell their house so they could buy our house so we can buy another house here. So the sale of a 230K house depends on somebody probably getting a low down payment loan for an $80K house. If the banks thinks that is a good tradeoff, who am I to argue? Even if someone defaults on the 80K house, the 230K people are highly likely to keep on paying.
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Random Musings
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Re: Tiny down payments for home mortgages are back

Post by Random Musings »

Usually, it takes a little more time than five years to go back to old habits that lead to a major crisis. What that tells me, is that in the aggregate, the lenders ended up doing pretty well over the entire boom-bust cycle when utilizing the strategy of accepting all the profits when times are good but ultimately spreading the downside risk to outside entities when that occurred. Sure, there were some people hurt during this process but not the ones that mattered. It's not the first time it has happened, nor is it the last.

RM
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garlandwhizzer
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Re: Tiny down payments for home mortgages are back

Post by garlandwhizzer »

It's not just that low down payments increase default risk (strategic defaults). The problem is that the US government, not the borrower or the lender, takes on that risk through GNMA, Freddie, Fannie, FHA, etc.. Government purchases of those mortgages shifts the risk burden to the taxpayer. If banks and individuals were left holding the bag when home prices went south instead of the taxpayer, mortgage interest rates would be much higher, reflecting those risks, and down payments would be much higher, more skin in the game. This would reduce home buying, a bad thing, but would make for a much less risky housing market. Also our tax system favors home purchase with the interest rate deduction, favorable tax treatment which other countries in general do not have. In short, real estate gets special treatment and support in the US relative to Canada, Europe, and everywhere else in the world. It pays to take risk in purchasing a home for investment purposes in the US, especially in non-recourse states like California where you simply walk away when the market turns south. 20% down payments, the old standard, effectively shifts that risk to the borrower and having to keep home loans of the bank's books rather than bundling them and selling them to a third party shifts lending risk to the bank. That is how things used to be done in the US a long time ago and how most of the world operates now, but I doubt that it will return here.

Garland Whizzer
Falco
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Re: Tiny down payments for home mortgages are back

Post by Falco »

While concerning, not the same as before...yet. The underwriting on lower down payment loans is much stricter these days. At the height if it in 2006 you could do stated income and stated asset(ie zero verification) 100% financing down to a 560 credit score. Today? Full documentation and minimum 680 score among other requirements.
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ElJay
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Re: Tiny down payments for home mortgages are back

Post by ElJay »

Homes are too expensive. I look at entry-level houses in my "small city" neighborhood here in Maine and I can usually comprehend to about 66% of what they want for them. The other 33% must be for the air that fills the house or something, because I'm not seeing it.
Jfet
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Re: Tiny down payments for home mortgages are back

Post by Jfet »

I just heard on the radio about a 108 month car loan.

Can you imagine taking out a 9 year loan for a car???
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Random Musings
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Re: Tiny down payments for home mortgages are back

Post by Random Musings »

Jfet wrote:I just heard on the radio about a 108 month car loan.

Can you imagine taking out a 9 year loan for a car???
A good number of people out there are struggling to make ends meet. Others are just plain ignorant about handling their finances. Bogleheads are more of an outlier; but if I got the price I wanted they can give me a 0% APR for nine years if they want to. :oops:

RM
I figure the odds be fifty-fifty I just might have something to say. FZ
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Epsilon Delta
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Re: Tiny down payments for home mortgages are back

Post by Epsilon Delta »

Jfet wrote:I just heard on the radio about a 108 month car loan.

Can you imagine taking out a 9 year loan for a car???
I wouldn't go for it, but it's at least relevant that most cars will actually last 9 years these days. You may be anchoring in days of yore when a 9 year loan would exceed the useful life of the vehicle.
Mudpuppy
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Re: Tiny down payments for home mortgages are back

Post by Mudpuppy »

The low down payment trend was only one part of the housing bubble. There was also the rampant fraud that affected many markets. Someone I went to high school and college with was involved in one of the fraud rings that was busted by the FBI. His father and his father's business partner would get various family members and employees to buy properties off others in the ring at an obscene profit, using inflated appraisals to trick mortgage companies into approving loans. It was like a Ponzi scheme for houses and the last mortgage company in the chain was left holding the proverbial bag. The trial is still pending against his father and his father's business partner.
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