There has been a lot of talk about QRM, 20 percent down, and much more. For the purpose of this post, let's forget about QRM, politics, what types of mortgages this will affect, and just keep this simple. More skin in the game for borrowers is the issue. Yes or No.
I have been wanting to talk about this for a few months, but I was inspired after reading this post by Bryan Robertson. ~ Why is NAR fighting the 20% rule in QRM? ~ Regarding Bryan's post, the one thing I do agree with is that home ownership is not a right, but a privilege. And that some lending guidelines were too loose.
I am wondering if we can agree on two things. Can we all say that the economy is not as good as it once was prior to 2006? And can we say that the economy is dependent on the real estate market by over 20 percent?
Three of the biggest arguments that have been floating around regarding the mortgage mess and our economy.....
1.) The lenders were too greedy with some of their mortgage programs, such as 100 percent no doc and stated doc loans.
2.) Little skin in the game caused the mortgage meltdown.
3.) Loss of jobs, loss of income.
One main issue that bothers me profusely, the reasons why people choose to walk away from their homes, because they were upside down on their homes, upside down on their mortgages. And so many state the main reason for this was because they should have put more down as a down payment, because home values dropped. Here is a comment that just scares me...
"The more skin in the game, the more likely one will fight extra hard to protect their investment. There's no two ways around it."
Then please explain the hundreds of thousands of strategic defaults that have plagued the foreclosure numbers. I have spoken to a dozen or so myself that had no problem financially in paying their mortgage payments and other debts. But just because they were upside down on their home, they walked away. Can I ask one simple question? Why? What was the main reason for buying that home in the first place? This will be another blog post topic in a few days.
You want shocking input?? Kenneth R. Harney wrote Who's most likely to walk away from their
~ Pros of 20 percent down or more ~
- Security - More skin in the game makes for a better buyer, homeowner. Me? False hope that it will keep more people in their homes, that they are better buyers.
Quick Rebuttal - Define better buyer. FHA has been around since 1934, allowing for 2% to 3% down payments. You also have VA loans and USDA loans that allow for 100 percent financing. All three of these types of mortgages have been performing well up until 2006, when the whole mortgage meltdown began. One can say that subprime loans had a lot to do with this. Loan officers putting borrowers into loans with higher rates or worse subprime program types, just because it was easier than a FHA loan, making it easier for the loan officer, but worse for the borrower. Sorry people, but this is a fact that I have witnessed first hand and even asked certain loan officers during that borrowers mortgage process.
~ Cons of 20 percent down or more ~
- Stripping away Cash, Savings, Reserves - If I had a choice of putting down 3.5 percent or 5 percent over 20 percent, I would do the lesser. Why? Unless I had a million dollars in the bank, it allows me to have access to more cash on hand for emergencies. And I have shown in prior blog posts, the differences with 5% down compared to 20% down. Besides, your house is no longer an ATM. It's much harder to get cash out once you put it down.
Quick Rebuttal - The buyer would just have to save more to have cash left over, having reserves.
Negative Impact of more down - The borrower might have nothing left over for emergencies such as a loss of job, a death in the family, or even to fix important issues regarding the house.
- Economy gets even worse - Would more jobs be lost if the housing economy dried up? In my opinion, 110% yes. Anything from new construction, to remodeling homes, to home repair stores, and those that make such materials for everything just mentioned. Kind of like the food chain.
Quick Rebuttal - I honestly can't think of one, can you?
How long do you think it would take for someone in today's economy to save 10 percent, or even 20 percent. Here are some figures compiled by specific groups and independent companies. See chart :
Let's see, it could take the average person 9 years just to save 10 percent down. What so many fail to realize, that we are talking about the average person. There are so many different factors that play into the role of saving money.
- Does a family only have one household income? How many in that household?
- The cost of living is higher than it has been in recent years and decades. Just look at the food prices and or gas prices, which in many cases, out-weigh what one makes on a monthly basis.
- Unknown debts that the average person does not always have, such as student loans, taking care of their parents, medical issues, etc, etc.
I have heard and seen most of it regarding these reasons in my 18 years in the mortgage business. It's been stated by several groups and those doing surveys and studies, that "High down payment and equity requirements will not have meaningful impact on default rates."
Let's look at a $250,000 purchase price. If I put 5% down, my mortgage would be $237,500 and if I put 20% down, my mortgage would be $200,000. Do you know what the difference in mortgage payment would be? $201.00 a month. Yes, there will be mortgage insurance, depending on the type of loan program. Mortgage Insurance can be a confusing topic and can also be written off for now. Read : Mortgage Insurance
But let's say your mortgage insurance is an extra $180 a month. If you out 20% down, your total savings is $381.00 a month. But wait, that is an extra $37,500 out of pocket. Ouch... That is about 8 years of saved monies. As you can see, buying a home takes careful planning and consideration. When is it a good time to buy a home?
We need to compare Apples to Apples - People keep comparing today to the 1970's and 1980's when their parents were able to save and put 20 percent down. Many say that it was just as hard back then as it is now to save. I disagree because of several different factors.
By forcing higher down payments, would this not penalize the responsible borrower? Which would make home ownership more expensive or out of reach to millions?
In my opinion, I consider Cash is king and a necessity to survive in today's economy. Since many are screaming about at least making it 10 percent down, here is an example of 3.5% down vs 10% down.
What are your thoughts and opinions? For those reading this, even though I am strongly against making more down a requirement, I still always try to respectfully dissect both sides with pertinent information so I can make a sound decision.
Adam Cohn wrote this post (I love stats and facts - research):
Understand the facts before screaming for such ludicrous changes that could kill the housing market. I do believe in tweaking some of the mortgage guidelines. Such as :
- Stronger debt ratios
- Required reserves
Here are some scary facts and not just opinions.
Maybe the economy would rebound better if the mortgage servicers improved. Recovery depends on mortgage servicers?
Maybe higher escrows withheld on jumbo loans? Fed rules on jumbo escrow requirements
Call to Action - If you believe in my thought process, print or e-mail this and send it to your Congress person, to other realtors, agencies....
One of my calls to action that I wrote about in June of 2009 :
Jeff's cliff notes (remember those? In my opinion, here are 3 excellent comments out of the 240 + from Bryan Robertson's post mentioned above. Keeping in mind that I have only read about 60 of the comments and not in any order)
Karen Hunt - comment # 167 - Unemployment, tax structure, and lax banking guidelines.
Brian Hoffman - comment # 169 - If forced to put 20% down only, economy would crash.
Dave Jerierski - comment #203 - 20% doesn't guarantee loan payments.
I wrote about tougher guidelines about a week ago.
Are mortgage guidelines actually tougher? I don't really think so. I think it begins with the loan officer properly educating both the consumer and realtor, and setting expectations to a certain level before one sets out to buy a home. How many of the loans that didn't closed in the last 12 months were probably do to loan officer errors not understanding credit, credit scores, or their lending guidelines.... and not just because the person didn't qualify, which should have been mentioned previous to the agreement of sale.
"Fight or argue with facts and not just your heart on your sleeve."
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