20% Down on a Home? Try 3%.

From the LA Times:

LA Times:
Hoping to broaden the pool of home buyers and boost the real estate market, Fannie Mae and Freddie Mac are launching mortgage programs with down payments as low as 3%.The move, targeting buyers with good credit but little cash, has drawn fire for encouraging the kind of risky lending that caused the mortgage meltdown and financial crisis. But Fannie and Freddie executives said the programs contain proper safeguards.The loans, unveiled Monday, reverse a trend of tighter lending standards by the government-sponsored mortgage giants since their taxpayer-financed bailouts. The programs allow only fixed-rate loans on single-family homes used as a primary residence.


"We are confident that these loans can be good business for lenders, safe and sound for Fannie Mae and an affordable, responsible option for qualified borrowers," said Andrew Bon Salle, executive vice president for single-family underwriting, pricing and capital markets at Fannie Mae. The programs could give a boost to first-time home buyers, who have largely stayed on the sidelines of the housing market rebound. First-time buyers this year made up the smallest share of the housing market in 27 years, according to the National Assn. of Realtors.

"First-time home buyers have had trouble, and a lower down payment always helps," said Mark Goldman, a mortgage broker who teaches real estate at San Diego State University. Sam Khater, deputy chief economist for housing data firm CoreLogic, predicted that the new loans would inject a bit of fuel into a housing recovery that's stalling out. But the main problem facing buyers is sluggish growth in their wages, not down-payment requirements, he said.

Fannie and Freddie purchase about half of all new home loans from banks and package them into securities for investors. But lenders still have to make the loans, and some remain skeptical of any 3% down-payment program. "The idea that you can get a mortgage with just 3% down is something that can get us back into bubble territory," Russell Goldsmith, chairman of City National Corp. in Los Angeles, said in a recent interview. Fannie Mae and Freddie Mac purchase about half of all new home loans from banks and package them into securities for investors. Bank of America Chief Executive Brian Moynihan told a conference recently that his bank was unlikely to participate. "I don't think there's a big incentive for us to start to try to create more mortgage availability where the customers are susceptible to default," Moynihan said last month.

The Federal Housing Finance Agency, which regulates Fannie and Freddie, announced its intent to launch the programs in October. Director Melvin Watt said Monday that the 3% down-payment programs come with strong underwriting standards that ensure sound lending practices. Borrowers can already tap a variety of low-down-payment mortgage programs, including those backed by the Federal Housing Administration and Veterans Administration, along with those from various state housing finance agencies, including California's.

But some of those loans carry higher fees or mortgage insurance premiums that can make them costlier than conventional mortgages. The new programs from Fannie and Freddie would enable more creditworthy borrowers, even those with lower incomes, to avoid high fees and pay less for private mortgage insurance. Since 2011, Freddie Mac has required at least a 5% down payment on loans it guarantees. Fannie Mae, starting late last year, required a 5% down payment for most mortgages it backed, but still offered to back loans with a 3% down payment made through some state housing finance agencies.

The Federal Housing Finance Agency said the 3% down payment loans would be a small portion of the firms' portfolios. Fannie Mae and Freddie Mac will offer somewhat different programs. Fannie Mae's program, which begins Saturday, will be available to anyone who has not owned a primary residence for three years. Private mortgage insurance will be required. Borrowers with Fannie Mae mortgages will be able to refinance under the program and can take out up to $2,000 to cover closing costs but will not be allowed to remove equity from their home.

Freddie Mac's program, called Home Possible Advantage, will begin in March. It is open to anyone who meets certain requirements, but first-time home buyers must participate in a homeownership education and counseling program. Homeowners with Freddie Mac mortgages could also refinance under the program, but would not be able to take any cash out as part of the process. Fannie Mae and Freddie Mac were seized by the government in 2008 as they teetered near bankruptcy because of bad mortgages they backed.

Taxpayers pumped $187.5 billion into the companies to keep them afloat. But as the housing market has rebounded, Fannie Mae and Freddie Mac have returned to profitability.This year, the firms finished repaying all the bailout money through quarterly dividend payments to the government. They have continued making billions of dollars in dividend payments, helping reduce the government's overall budget deficit.

Thoughts? Kinda scary especially since loose lending on housing like this is widely viewed by the public as the main driver for the housing bubble and ultimately the financial crisis in 2008.

 

Seriously? You could buy a house for 3.5% down all through out the crisis and the ensuing lame economy. Nothing new to see here. This has more to do with attempting to tie people down to one location. Migration of people is one of the largest and hardest to forecast unknowns in economic planning.

Follow the shit your fellow monkeys say @shitWSOsays Life is hard, it's even harder when you're stupid - John Wayne
 
heister:

Seriously? You could buy a house for 3.5% down all through out the crisis and the ensuing lame economy. Nothing new to see here. This has more to do with attempting to tie people down to one location. Migration of people is one of the largest and hardest to forecast unknowns in economic planning.

Not all loans are the same. FHA loans that allowed 3.5% down also came with much, much more expensive mortgage insurance set by the FHA.

 

Freddie and Fannie is the biggest heist ever. Not only did they help cause the housing bubble, but they also underwrite the student loans for the government. Guess who owns the collections agencies for student loans? You guessed it, Freddie and Fannie

 

Anyone who doubts the governments role in creating the housing crisis only needs to read this. Requiring 20% down proves you have the financial ability to buy a home and the skin in the game to keep it. It also provides an equity cushion for the banks.

What a joke this crap is.

 
<span class=keyword_link><a href=/company/trilantic-north-america>TNA</a></span>:

Anyone who doubts the governments role in creating the housing crisis only needs to read this. Requiring 20% down proves you have the financial ability to buy a home and the skin in the game to keep it. It also provides an equity cushion for the banks.

What a joke this crap is.

This. How the hell are there people who still don't get it. I get sick & tired of hearing about how "Wall Street tanked the economy"....no, it was insane, asinine government programs like this.

The new normal is, huge bubble -> prolonged "recovery" building up to a new debt-fueled crash. This time, we can't afford a crash.

"When you stop striving for perfection, you might as well be dead."
 

This is nothing like the subprime bubble. Just look at average FICO scores today vs. last cycle, it's really night and day. Now FnF are willing to take much lower FICOs, but that far banks have been unwilling to underwrite to them. We'll see if that changes with some of the rep/warranty/putback clarity. If you want to find a bubble go look in auto lending. It's definitely not in the housing market (at least not thus far).

Also not sure how you can call FnF a "heist". Without them mortgage rates would be at least 100bps higher for everyone, and probably 200-300bps higher for lower income/minority borrowers. It's actually a huge subsidy to U.S. consumers. Government has also made a massive profit on FnF bailout (and continues to do so). For sure they're not completely innocent from blame for last cycle, but they were far from the worst actors (see rating agencies, mortgage originators, banks etc.).

 
Best Response
jankynoname:

This is nothing like the subprime bubble. Just look at average FICO scores today vs. last cycle, it's really night and day. Now FnF are willing to take much lower FICOs, but that far banks have been unwilling to underwrite to them. We'll see if that changes with some of the rep/warranty/putback clarity. If you want to find a bubble go look in auto lending. It's definitely not in the housing market (at least not thus far).

Also not sure how you can call FnF a "heist". Without them mortgage rates would be at least 100bps higher for everyone, and probably 200-300bps higher for lower income/minority borrowers. It's actually a huge subsidy to U.S. consumers. Government has also made a massive profit on FnF bailout (and continues to do so). For sure they're not completely innocent from blame for last cycle, but they were far from the worst actors (see rating agencies, mortgage originators, banks etc.).

Respectfully, I disagree and not about a comparison of now and then or FICO scores and the other details. And not that there weren't other bad actors involved in the previous bubble, but having an end buyer for nearly all conforming loans is what inflates the housing market, bubble or not, because it creates too much liquidity in the mortgage market overall. It's nearly impossible to get rid of FnF now and not have a similar buyer in place because it would gum up the housing market for decades, but housing is too expensive in the US because it's not a free market looking at the loans and saying yes or no, it's basically conduit lenders who originate with a warehouse line who can then dump them off and investors get the implicit guarantee of the US government for those instruments so they're not underwriting the bonds or loans, they're just leaning on the credit of the US. Even though it's part of the American dream, not everyone is meant to own a house. And housing wouldn't be as expensive as it is if there weren't a nearly unlimited amount of liquidity on the back end.

There's also the clear lack of fairness to it all, and I believe fair is a four letter word so I'm not complaining from a personal point of view, but when a more qualified buyer who actually makes the money required to service a mortgage and has higher credit but decides to buy a house above the conforming numbers, they usually end up paying more because a lender can't get it off its balance sheet by selling it to Fannie. And geographically, it's absolutely unfair even with the higher limits in some counties, because, for example, someone buying a house in suburban Boston has a limit of about $520k where half a million can buy a 1500 sf fixer upper, and a buyer in suburban Little Rock has a limit of about $420k, which can buy a palace.

At the end of the day, the agencies inflate the cost of real estate for everyone and even though it seems like it levels the playing field, it simply puts everyone in more overall debt and artificially inflates the price of real estate for everyone. I'm not proposing a solution, but it was a bad move for the government to get into it in the first place.

 
jankynoname:

This is nothing like the subprime bubble. Just look at average FICO scores today vs. last cycle, it's really night and day. Now FnF are willing to take much lower FICOs, but that far banks have been unwilling to underwrite to them. We'll see if that changes with some of the rep/warranty/putback clarity. If you want to find a bubble go look in auto lending. It's definitely not in the housing market (at least not thus far).

Also not sure how you can call FnF a "heist". Without them mortgage rates would be at least 100bps higher for everyone, and probably 200-300bps higher for lower income/minority borrowers. It's actually a huge subsidy to U.S. consumers. Government has also made a massive profit on FnF bailout (and continues to do so). For sure they're not completely innocent from blame for last cycle, but they were far from the worst actors (see rating agencies, mortgage originators, banks etc.).

This isn't like the subprime bubble, you're right. This is like the early 1990's, which ultimately evolved into the subprime crisis. The subprime crisis didn't originate (no pun intended) out of thin air.

With regard to subsidizing consumers, that is just flat out misguided. The more these organizations "subsidize consumers" the more expensive home prices become. Somebody is paying for the subsidy--that "somebody" is the home-buyer. The home-buyer is subsidizing the borrower, which just so happens to be the same person.

 

Most of these programs create an unnatural balance in supply/demand. Look at what happened to the cost of going to college since the inception of everyone gets a student loan and the companies making the loans can't lose. The price increases have been astronomical. This is one of the main reasons why there is such a dislocation between asset prices and incomes. I suspect this will "correct" through time.

 
ArcherVice:

Most of these programs create an unnatural balance in supply/demand. Look at what happened to the cost of going to college since the inception of everyone gets a student loan and the companies making the loans can't lose. The price increases have been astronomical. This is one of the main reasons why there is such a dislocation between asset prices and incomes. I suspect this will "correct" through time.

Yeah it still blows my mind that a piece of paper for two years can cost the same as a 200K 30 year mortgage that takes people five years to save a down payment for.

 

The whole thing is crazy when you think about it. It's interesting, in the wake of the 'housing crisis' the mentality has subtly shifted from homes being seen as assets, to now being seen more as liabilities. I suspect when the student loan debacle plays out, and many people are in jobs that don't require their degree but paying off the mortgage (student debt) keeping them from a nice home, we'll see "return on degree" metrics being used as opposed to "broadening horizons" and less people will opt for going to school. Repealing those loan programs would expedite the process though.

 

The fallacy in all this is the idea that everyone should own a home. This is just as dumb as saying that everyone in the US should get a college education. Home ownership isn't for everybody, and it shouldn't be forced in our heads that it is a path to an improved financial future. Some of these idiots that can't balance a checkbook have a home. Can't keep a plant alive, but they are now homeowners.

"Decide what to be and go be it." - The Avett Brothers
 

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