Is The Fed the Fix or The Fly In The Ointment – The Senate today rejected a proposal by Sen. Bob Corker to impose a minimum 5% down payment for virtually all home mortgages. The amendment to the broader financial regulatory overhaul bill, which failed 42-57, would have required income verification and an assessment of borrowers’ ability to repay as well. Corker’s proposal also would have stripped out a provision that required financial firms securitizing loans to keep a 5% portfolio risk.
Democrats then passed their own amendment imposing some underwriting standards, but no minimum down payment. Regarding Corker’s bill, Democrats argued that a 5% down payment would hurt minorities and the poor.
But if you can’t scrape together a 5% payment, maybe you should remain a renter.
It wasn’t that long ago that a 20% down payment was standard and 10% was deemed risky. A sizeable down payment gives homeowners a strong incentive to make their payments and gives them a cushion against home prices fluctuations. Now 5% is too restrictive? For all the focus on derivatives and securitization, the financial crisis stemmed from junk mortgages. People bought homes with little or no money out of pocket and couldn’t afford the monthly payments. Regulators and politicians encouraged or sat passively as lenders lowered their credit standards during the bubble.
In the short term, home ownership rates rose to record highs. But it was a house built on sham documents and negative equity. Even after the crisis, severe recession and massive bailouts, that easy credit mentality still reigns in Washington. The Federal Housing Administration requires only a 3.5% down payment. FHA officials told Congress in March that raising the minimum to 5% would reduce FHA-backed loans by 40% – right. . . The fact is that 87% of all mortgages written today are federally secured. If Fannie or Freddie stepped back, the government set down payment standards to a higher level and required a buyer to prove that they can afford the loan they are requesting, things would be drastically different. The fact is the market has way to much RISK. If I asked you to lend me $300,000.00 to buy a home in Escondido with only 3.5% down that sold for $155,000.00 in 2000, and then again for $525,000.00 in 2006 – would you lend me the money?? – – the answer is NO WAY !!!
The issue with the market today is the market. Robbing Peter to pay Paul is the current rule, and will ultimately destroy the market. We the tax payers are required to securitize the mortgage industry through our tax contributions. Investors, these are the “brilliant guys” that know what a bad deal looks like (yes Goldman Sachs., et al). No one on Wall Street wants the risk and if they do consider it, the cost is staggering. Sorry here’s my question. When Banks and Investors DO NOT want mortgage securities because the “risk” is too high, why should we the tax payer pick-up the tab?? Answer: Because as long as the Government maintains relaxed standards for lending investors will simply sit back, watch the market fall, and acquire the federally insured debt at 40 cents on the dollar. I mean why risk it – right?? The best part is that the guys who approved the hundreds of Billions of dollars paid to maintain these institutions are the same ones voting “NO” on the housing bills that would ultimately help stabilize the market. The point is, don’t believe what you read, do your homework, and call my office when its time to buy or sell. The biggest advantage you’ll ever gain in today’s market is spending 30 minutes with me discussing what I can do for you.