Lowering Required Home Downpayments Could Lead To Big Trouble
Earlier this week, the Federal Housing Finance Agency lowered the required down payment for borrowers from Freddie Mac and Fannie Mae to 3% of the price of a house. Dean Baker explains the problem:
A study by the Center for Responsible Lending found that the default rate for loans with down payments of between 3 to 10 percent was nearly 9 percent. This is more than 80 percent higher than the default rate it found for mortgages with down payments of 10 percent or more. The gap would be even larger of the comparison was restricted to those with down payments between 3 to 5 percent, with mortgages with down payments of 20 percent or more.
Auirnd Kevin Drum asks the natural question:
Click here for reuse options!This decision by the FHFA is almost criminally myopic. After all, the go-go years that produced a towering housing bubble and then ended in an epic global financial meltdown are less than a decade in the past. Have we really forgotten so soon the primary lesson of these years?
Copyright 2014 Liberaland
By: Stuart Shapiro
Stuart is a professor and the Director of the Public Policy
program at the Bloustein School of Planning and Public Policy at Rutgers
University. He teaches economics and cost-benefit analysis and studies
regulation in the United States at both the federal and state levels.
Prior to coming to Rutgers, Stuart worked for five years at the Office
of Management and Budget in Washington under Presidents Clinton and
George W. Bush.
50 responses to Lowering Required Home Downpayments Could Lead To Big Trouble
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Larry Schmitt December 10th, 2014 at 18:15
This allows people who have no business doing so to buy a house. There’s more to owning a house than just making payments. This is similar to what a lot of car buyers do, extend the loan to seven years or even more, because they (with the help of the salesman) focus only on the monthly payment. So they wind up with a loan that lasts longer than the car does, and they either end up paying for a car they no longer have, or they roll it over into a new loan. Kind of like a huge payday loan.
amongoose December 19th, 2014 at 12:47
Rollover a loan instead of paying it off, kind of sounds like what they do with our national debt.
The biggest problem wasn’t so much lack of down payments that caused the problem it was allowing the qualification rules to be eased for loan qualification. The joke here in Florida was that the only qualification needed was the ability to fog a mirror.
Larry Schmitt December 10th, 2014 at 19:15
This allows people who have no business doing so to buy a house. There’s more to owning a house than just making payments. This is similar to what a lot of car buyers do, extend the loan to seven years or even more, because they (with the help of the salesman) focus only on the monthly payment. So they wind up with a loan that lasts longer than the car does, and they either end up paying for a car they no longer have, or they roll it over into a new loan. Kind of like a huge payday loan.
amongoose December 19th, 2014 at 13:47
Rollover a loan instead of paying it off, kind of sounds like what they do with our national debt.
The biggest problem wasn’t so much lack of down payments that caused the problem it was allowing the qualification rules to be eased for loan qualification. The joke here in Florida was that the only qualification needed was the ability to fog a mirror.
tiredoftea December 10th, 2014 at 18:25
While I agree this seems to be a reckless move made to placate the mortgage industry, it may not be as bad a change as feared by FHFA’s critics. As long as the house purchaser’s income is verified, their credit is high and few of the mortgage’s are ARMS, this could be good for the rest of the economy that is lagging behind the large corporations that have reaped the benefits of the recovery from the 2009 recession. Housing is roughly 25% of the overall economy and is responsible for many trade jobs with the inevitable extension to local economies.
tracey marie December 10th, 2014 at 18:30
very good comment
tiredoftea December 10th, 2014 at 19:25
While I agree this seems to be a reckless move made to placate the mortgage industry, it may not be as bad a change as feared by FHFA’s critics. As long as the house purchaser’s income is verified, their credit is high and few of the mortgage’s are ARMS, this could be good for the rest of the economy that is lagging behind the large corporations that have reaped the benefits of the recovery from the 2009 recession. Housing is roughly 25% of the overall economy and is responsible for many trade jobs with the inevitable extension to local economies.
tracey marie December 10th, 2014 at 19:30
very good comment
tracey marie December 10th, 2014 at 18:30
The DTI rate has not been lowered, the effect will be minimal. 31/36
tracey marie December 10th, 2014 at 19:30
The DTI rate has not been lowered, the effect will be minimal. 31/36
mea_mark December 10th, 2014 at 18:38
This would probably work out OK as long as the percentage of income used to make the payment was less than what it would be if they were putting down more. It would be easier to get into an affordable house (small down payment) and harder to get into a house that isn’t as affordable (high down payment). There should be some sort of trade off to minimize the risk.
Carla Akins December 10th, 2014 at 20:03
But smaller down payment means PMI which mean higher payment, with no equity building. A good deal of the folks have insufficient money management skills and it’s just another setup for failure. A couple struggling to save 3% to meet the loan conditions are going to lack any backup fund for replacing a furnace, roof, or broken pipe. I do not wish to take the American dream from anyone, but they should require classes in budgeting and be able to document a years worth of proper budget handling and savings.
tracey marie December 10th, 2014 at 20:34
A good real esate agent and LO will not let them buy/qualify for a home that is too expensive
mea_mark December 11th, 2014 at 09:20
That is one of the reasons I think they shouldn’t let you use as large a percentage of your income to qualify for the loan. Low down payment should only be for houses that cost less, not the most expensive how you think you can afford.
mea_mark December 10th, 2014 at 19:38
This would probably work out OK as long as the percentage of income used to make the payment was less than what it would be if they were putting down more. It would be easier to get into an affordable house (small down payment) and harder to get into a house that isn’t as affordable (high down payment). There should be some sort of trade off to minimize the risk.
Carla Akins December 10th, 2014 at 21:03
But smaller down payment means PMI which mean higher payment, with no equity building. A good deal of the folks have insufficient money management skills and it’s just another setup for failure. A couple struggling to save 3% to meet the loan conditions are going to lack any backup fund for replacing a furnace, roof, or broken pipe. I do not wish to take the American dream from anyone, but they should require classes in budgeting and be able to document a years worth of proper budget handling and savings.
tracey marie December 10th, 2014 at 21:34
A good real esate agent and LO will not let them buy/qualify for a home that is too expensive
mea_mark December 11th, 2014 at 10:20
That is one of the reasons I think they shouldn’t let you use as large a percentage of your income to qualify for the loan. Low down payment should only be for houses that cost less, not the most expensive house you think you can afford.
If you could qualify for a house normally with your payment taking over 30% of your income, then with a lower down payment you should only be allowed to use 25% of your income to make the payment. That would mean you would have to find a cheaper house that was more easily affordable. Your payments would therefore be less and you would still build equity at the same speed.
fancypants December 10th, 2014 at 18:43
why not be the one to say Finally someone did something so more people can put a roof over their head.
ok I will go first
mea_mark December 10th, 2014 at 18:51
As long as it is an affordable house, great.
tracey marie December 10th, 2014 at 20:33
the only thing that changed was the downpayment. The credit rating, DTI and ability to pay are all still intact
mea_mark December 11th, 2014 at 09:31
They need to change the DTI for low down payment loans. Less down should mean less house that is easier to afford. Less down with with same house just means it is time to gamble in the housing market.
tracey marie December 11th, 2014 at 11:37
DTI is debt to income and has nothing to do with the price of the home.
mea_mark December 11th, 2014 at 14:06
Not exactly, but it does the amount of the payment you can make which determines how expensive a house you can buy.
tracey marie December 11th, 2014 at 14:10
No, it is a percentage of debt to mortgage and percentage to total debtallowed to qualify for the loan.
mea_mark December 11th, 2014 at 14:18
And that will influence the amount of the payment you can make every month.
tracey marie December 11th, 2014 at 14:24
and? you are suggesting limiting the amount of the loan and house value which the DTI already does
mea_mark December 11th, 2014 at 14:36
For low down payment loans, yes. If you are putting down more you can take more risk if you want. Less risk (low down payment) less house. More risk (higher down payment) more house.
That is what they should do.
tracey marie December 11th, 2014 at 15:19
the DTI takes care of that already
fancypants December 10th, 2014 at 19:43
why not be the one to say Finally someone did something so more people can put a roof over their head.
ok I will go first
mea_mark December 10th, 2014 at 19:51
As long as it is an affordable house, great.
tracey marie December 10th, 2014 at 21:33
the only thing that changed was the downpayment. The credit rating, DTI and ability to pay are all still intact
mea_mark December 11th, 2014 at 10:31
They need to change the DTI for low down payment loans. Less down should mean less house that is easier to afford. Less down with with same house just means it is time to gamble in the housing market.
tracey marie December 11th, 2014 at 12:37
DTI is debt to income and has nothing to do with the price of the home.
mea_mark December 11th, 2014 at 15:06
Not exactly, but it does the amount of the payment you can make which determines how expensive a house you can buy.
tracey marie December 11th, 2014 at 15:10
No, it is a percentage of debt to mortgage and percentage to total debtallowed to qualify for the loan.
mea_mark December 11th, 2014 at 15:18
And that will influence the amount of the payment you can make every month.
tracey marie December 11th, 2014 at 15:24
and? you are suggesting limiting the amount of the loan and house value which the DTI already does
mea_mark December 11th, 2014 at 15:36
For low down payment loans, yes. If you are putting down more you can take more risk if you want. Less risk (low down payment) less house. More risk (higher down payment) more house.
That is what they should do.
tracey marie December 11th, 2014 at 16:19
the DTI takes care of that already
Budda December 10th, 2014 at 19:26
At 3% you don’t have an equity interest in the house. This is wrong in many ways.
searambler December 10th, 2014 at 20:24
Sure ya do. Three percent. Which would be six grand on a $200,000 house. Not a fortune, to be sure, but nothing to sneeze at for most people.
Budda December 10th, 2014 at 22:56
Let me re-phrase it. Not enough equity…too easy to walk away.
If six grand is a lot of money to people buying a $200K house they’ll have problems with maintenance, taxes, utilities etc.
Budda December 10th, 2014 at 20:26
At 3% you don’t have an equity interest in the house. This is wrong in many ways.
searambler December 10th, 2014 at 21:24
Sure ya do. Three percent. Which would be six grand on a $200,000 house. Not a fortune, to be sure, but nothing to sneeze at for most people.
Budda December 10th, 2014 at 23:56
Let me re-phrase it. Not enough equity…too easy to walk away.
If six grand is a lot of money to people buying a $200K house they’ll have problems with maintenance, taxes, utilities etc.
rg9rts December 11th, 2014 at 04:41
Here ya go the house just approved a plan to stick it to the taxpayer when Wall St makes high risk investments like the did in 08 and originated the saying”Too Big To Fail”
rg9rts December 11th, 2014 at 05:41
Here ya go the house just approved a plan to stick it to the taxpayer when Wall St makes high risk investments like the did in 08 and originated the saying”Too Big To Fail”
FrankenPC . December 16th, 2014 at 22:38
Considering how under regulated the banks are, ANY home loan is trouble. Why not lower the down payment? The risk factor can’t possibly be that much different from say 20% down to 10%.
Side note: why is no insurance company offering recession insurance. It’s a rhetorical question.
FrankenPC . December 16th, 2014 at 23:38
Considering how under regulated the banks are, ANY home loan is trouble. Why not lower the down payment? The risk factor can’t possibly be that much different from say 20% down to 10%.
Side note: why is no insurance company offering recession insurance. It’s a rhetorical question.