The 3% down payment mortgage is coming back. The recently appointed head of the FHFA, Mel Watt, announced that Fannie Mae and Freddie Mac will ease lending standards and begin taking on loans with a 3% down payment; reduced from the previous lower bound of 5%. Unsurprisingly, this move carries some degree of risk, as noted by the WSJ:
Borrowers with low down payments do default in higher numbers than similar borrowers with higher down payments, said Mark Zandi, chief economist at Moody’s Analytics. That’s because homeowners with plenty of equity in their homes who fall into financial trouble can sell their houses rather than fall into foreclosure.However, Mr. Zandi still believes that low-down-payment lending can be done in a responsible way, by making sure borrowers have solid credit, have low ratios of debt compared with their income and are taking on standard loans, such as 30-year fixed-rate mortgages.
Zandi's comments appear to fit the spectrum of thought described in the WSJ article. If you believe that low down payments can and will be done in a responsible way, you'll side with the Center for American Progress:
“We shouldn’t obsess about down payments,” said Julia Gordon, director of housing policy at the liberal Center for American Progress. “Research confirms that low- down-payment loans to lower-wealth borrowers perform very well if the mortgages are well-underwritten, safe and sustainable.”
However, if you're inclined to think that low down payments will attract those with weaker credit and higher debt ratios, you may side more with the Cato Institute:
“Low down payments, coupled with weak borrower credit, were the most important drivers of default in the recent crisis,” said Mark Calabria, director of financial regulation studies at the Cato Institute. “Washington’s re-embrace of low-equity mortgage lending is further evidence that D.C. policymakers have zero interest in addressing the actual causes of the financial crisis.”
How do you monkeys think this will work out going forward? Should we be wary of new CMO vintages? Are we looking at the beginnings of a new housing bubble? Or is this move generally begnin, given that there are plenty of low down payment options (e.g. VA loans, USDA loans, etc.) absent this new change in policy?
Fucking amazing. These people have no rear-view mirror do they?
I think they just don't care. This is all a cycle. The people who should care are the little guys who put 3% down, "have" a house for a year or two and lose everything during another downturn.
wonder if I'll be able to buy a house when i graduate from business school. I'll have very high salary and great credit, but also a huge student loan debt.
i am very curious why this was monkey shitted
The key words are "well underwritten", which this article does not give any detail on.
I've seen the current underwriting on these low down pay securitized products. No one really cares because it is guaranteed by GSE's. Investors go YOLO and treat them as prime mortgages with 20% downpay (typical agency mortgage pools) with slightly high prepayments.
Well there is money to be made here, we know how this ends.
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