FHA rejects calls for higher down payments

jayK said: I don't see this causing a big issue, seeing that lenders' standards for issuing credit have tightened up considerably since the peak of the bubble. The increase proposed was marginal anyway (3.5% to 5%).

If they're making loans to people who can only afford 3.5% down then even a small increase in minimum down payments would probably do a lot to eliminate the highest default risks.

ppatin said: jayK said: I don't see this causing a big issue, seeing that lenders' standards for issuing credit have tightened up considerably since the peak of the bubble. The increase proposed was marginal anyway (3.5% to 5%).

If they're making loans to people who can only afford 3.5% down then even a small increase in minimum down payments would probably do a lot to eliminate the highest default risks.I would rather see credit risk evaluated on a case-by-case basis instead of establishing an artificial floor. I'm sure there are borrowers out there that are good credit risks, but haven't saved up enough for a down payment.

ppatin said: http://blogs.wsj.com/developments/2009/10/13/fha-head-rejects-ca...

Hopefully this won't turn into a political discussion, but why do I have a bad feeling that we're saying the makings of a second housing fiasco building here. There have already been plenty of warnings that FHA will be the next subprime, but it looks like the people running it are going to stick their heads in the sand. The opening paragraph really annoyed me:

"The head of the Federal Housing Administration warned that raising down payment requirements or taking similar steps to limit the pool of eligible buyers for FHA-backed loans would hamstring a fragile housing recovery."

Uh, maybe if your economic recovery plans are based around housing purchases by people who can't afford down payments it's time to come up with a Plan B. Also, who says that a "housing recovery" is a good thing? Housing prices have been out of whack with people's salaries for the past decade, and it sounds like "recovery" is an attempt to reinflate them to unrealistic prices.

Blanket policies do not work. They need to look at people on an application per application basis. Joe Blow A may have the $ and income to get a house, just not a down payment while Job Blow B wrecked his credit and is in debt over his head. Two different situations that call for different results.

Increase down payment to 5% and increase First-Time Home Buyers Tax Credit to $15,000. Problem solved. next?

Xnarg said: Zro said: Increase down payment to 5% and increase First-Time Home Buyers Tax Credit to $15,000. Problem solved. next?How about getting rid of the 1st time home buyer credit so as to reduce the incentive for people who can't afford homes on their own to buy them?I'd go even further than that...remove all restrictions on down payments. If borrowers have excellent credit and can show that they can afford the payments, let them put zero down. The only restriction should be requiring all FHA loans to be positive amortization.

jayK said: ppatin said: jayK said: I don't see this causing a big issue, seeing that lenders' standards for issuing credit have tightened up considerably since the peak of the bubble. The increase proposed was marginal anyway (3.5% to 5%).

If they're making loans to people who can only afford 3.5% down then even a small increase in minimum down payments would probably do a lot to eliminate the highest default risks.I would rather see credit risk evaluated on a case-by-case basis instead of establishing an artificial floor. I'm sure there are borrowers out there that are good credit risks, but haven't saved up enough for a down payment.

Once again, we've seen how people behave when they have no "skin" in the game. I'm in support of a mandatory minimum 20% downpayment for any mortgage, and if it's investment property, 50%.

If only we had some historical basis to judge the soundness of high LTV loans......

Cerdo said: jayK said: ppatin said: jayK said: I don't see this causing a big issue, seeing that lenders' standards for issuing credit have tightened up considerably since the peak of the bubble. The increase proposed was marginal anyway (3.5% to 5%).

If they're making loans to people who can only afford 3.5% down then even a small increase in minimum down payments would probably do a lot to eliminate the highest default risks.I would rather see credit risk evaluated on a case-by-case basis instead of establishing an artificial floor. I'm sure there are borrowers out there that are good credit risks, but haven't saved up enough for a down payment.

Once again, we've seen how people behave when they have no "skin" in the game. I'm in support of a mandatory minimum 20% downpayment for any mortgage, and if it's investment property, 50%.The only people who should qualify for a 0% down mortgage would be those with means and excellent credit...and they certainly have "skin" in the game in the form of their credit. If that's not enough, make 0% down mortgages into recourse loans.

Setting an artificial floor would disrupt the free market and prevent lenders from making perfectly good loans.

Xnarg said: How about getting rid of the 1st time home buyer credit so as to reduce the incentive for people who can't afford homes on their own to buy them?

Obviously, I was being quite facetious. This isn't so much a problem of gov't policy (FHA offering loans at 96.5% LTV) as it is one of fiscal responsibility at the individual level. A lending institution accepts a certain % of defaults in their portfolio, ultimately impacting cash flow (usually offset by profits). However, an individual, more than likely, cannot sustain a hit. When a person experiences a hardship that significantly impacts cash flow, said person is facing imminent default until (positive) cash flow is restored. This can be mitigated through 'rainy-day funds' and other semi/liquid assets. However, most people do not have a contingency plan like this and they eventually short sale/foreclose or file 7/13 (sometimes both).

You can't legislate fiscal responsibility to the individual level, you can only make it less advantageous.

IMO, this whole first-time home buyers credit was poorly thought out. This credit essentially transitions renters to home owners and creating an artificially (temporarily) high demand for homes, ultimately leading to increased housing prices. However, you now have apartment vacancy rates screaming higher and rents going the other way. Higher housing prices and lower rents? What's that do to the home affordability index?

Then when the tax credit expires and demand goes down, home prices will follow. Rinse and repeat circa 2005-7.

Absolutely nothing was learned from the subprime crisis... Last to learn, as usual, is govt. Supply and demand can be manipulated, but not controlled indefinitely... This artificial demand will dry up at some point and a severe correction in home "values" will likely occur.

Hindustani said: I also feel the same way. Increasing the down-payment from 3.5% to 5.0% isn't going to reduce the risk as much. I rather see FHA's credit evaluation being made more stringent to disqualify high rish individuals from qualifying for FHA loan in the first place. Uh... 5% is ~43% more than 3.5%, that is huge. 3.5 and 5% might seem small, but a 43% difference is not...

jayK said: would rather see credit risk evaluated on a case-by-case basis instead of establishing an artificial floor. I'm sure there are borrowers out there that are good credit risks, but haven't saved up enough for a down payment. A crappy economy turns good credit risks into bad ones. Are you 100% sure the govt intervention will turn the economy around? I'd bet against you... Besides this is a wide sample here, not your neighbors down the street. Risks, and defaults, can be predicted with some degree of accuracy and they will be substantially higher... But who the hell cares right? Just dump the burden on the suckers that are still paying taxes... or inflate away for eternity.

JohnGalt69 said: jayK said: staci86 said: If only we had some historical basis to judge the soundness of high LTV loans......The historical basis you are speaking of is coupled with loose lending standards, which does not exist today. I would argue that default rate is correlated more with poor credit and lack of means than LTV.

Actually the default rate is correlated most strongly with LTV. Poor credit (subprime) is actually a small part of the default problem.Source?

Cerdo said: There is no free market in mortgages. With GSE's and FHA guaranteed loans, there is an implicit government backstop in every mortgage that is conforming.0% down (or 3.5% down, or 5% down) loans are not conforming.

In a truly free market of which you speak, banks would be required to hold their mortgages to completion.How would you ensure there is sufficient liquidity in this type of market?

Side note: Credit score is now considered "skin"? We have factual evidence that people are willing to forgo the almighty credit score much quicker than the models predicted.Correct...low LTV mortgages are more risky, and they would be priced accordingly. I'm not sure why people are in favor of banning them outright.

In a year or two when defaults on mortgages are still high and recent changes in credit card regulations don't provide the relief needed, there will be political pressure to wipe negative information off credit reports. Sounds laughable, but so did a bank bailout back in 2006.Flawed logic. If A was laughable 3 years ago, and A eventually happened, the fact that B is laughable now does not mean that B will necessarily happen.

Zro said: Source?
http://files.ots.treas.gov/19710.html

Old but applicable

Article said: Loan-to-value (LTV) ratio explains more of the variation in default rates than any other factor.I found that article too, but I'm not sure data from 1991 to 1995 has much applicability to today's market.

jayK said: ppatin said: jayK said: I don't see this causing a big issue, seeing that lenders' standards for issuing credit have tightened up considerably since the peak of the bubble. The increase proposed was marginal anyway (3.5% to 5%).

If they're making loans to people who can only afford 3.5% down then even a small increase in minimum down payments would probably do a lot to eliminate the highest default risks.I would rather see credit risk evaluated on a case-by-case basis instead of establishing an artificial floor. I'm sure there are borrowers out there that are good credit risks, but haven't saved up enough for a down payment.
I'm about to buy a house that the wife and I could put down about 50% in cash for. But we could also get an FHA loan and let that cash work for us in more productive ways, so that's probably what we'll end up doing. Agreed that not all people who put down 3.5% are greater credit risks, but I do think bumping it up to 5% gives at least a little bit more protection for the government's backing of the loan.

jayK said: ppatin said: jayK said: I don't see this causing a big issue, seeing that lenders' standards for issuing credit have tightened up considerably since the peak of the bubble. The increase proposed was marginal anyway (3.5% to 5%).

If they're making loans to people who can only afford 3.5% down then even a small increase in minimum down payments would probably do a lot to eliminate the highest default risks.I would rather see credit risk evaluated on a case-by-case basis instead of establishing an artificial floor. I'm sure there are borrowers out there that are good credit risks, but haven't saved up enough for a down payment.

I agree with this. It should also depend on the circumstances. Say, you use a 25% downpayment for a $1.5MM apartment in NYC, using only your last year's income (which was artificially high) to backup the mortgage. Compare that to a 5% downpayment for a $85K house in some smaller city using the average of your relatively stable income from a job that you have been in for the past 10 years. From my point of view, the latter is a better risk.

Also, banks need to start evaluating housing market risk. Take the Case Shiller index, and calculate volatility for different cities. You will see that volatility in NYC, Los Angeles, etc, are much higher, than say, Cleveland. Then, since mortgage is essentially giving the buyer an option on the future appreciation of the house, a higher volatility of the underlying market indicates that the option should be sold at a higher price, i.e., higher APR. (calling the mortgage + purchase an option is technically incorrect, but it essentially is, because of the option to walk away + no recourse. consumer pays in the form of credit hit, so call that "regret" anti-rebate, but that "rebate" is not worth anything to the bank, other than information to NOT lend him / her next time around.)

If you have a market where price volatility is 1.3, maybe 1.6 times lower, then of course a 5% downpayment is more acceptable.

The other thing that matters is the income of the borrower and the difficult to replace it. The higher the income, the higher the chance that it won't be replaceable with similar income.

Someone making $500K in NY may not be that much money among rich people in NY, but might be a LOT of money among the general population of NY.

Compare that to another borrower who makes average income in some suburb of Charlotte, NC.

A 20, maybe 30% downpayment seems like a fair game for the millionaire New Yorker, while the Charlotte average Joe might only need to put 5% down for that $95K house.

jayK said: On a $200K house, the difference between 3.5% and 5% is $3K, hardly enough equity to matter in the long run.
1.5% means a hell of a lot at high LTVs. One major contributing factor to the housing meltdown was the availability of loans to people who had to simply sign their name and kick in a bit of their own money (assuming they weren't engaging in grant abuse or seller-planned escrow fraud)

Needing to make a sacrifice to get in a home acts as a useful filter to weed out irresponsibility and irrational purchasers.

Even at slightly lower LTVs, banks still lose money on foreclosures, so it isn't as much an equity issue as a qualification issue.

Equity based lending generally caps out at a 65% LTV.

According to this New York Times article FHA loans written from 2005 - 2008 have a 20 - 30% default rate. Since 2008, FHA loans have grown to be about 27% of the mortgage market.

That's what is so great... since the government is gambling with taxpayer(suckers) money the loans don't have to make any sense or be viable.

Xnarg said: Zro said: Increase down payment to 5% and increase First-Time Home Buyers Tax Credit to $15,000. Problem solved. next?How about getting rid of the 1st time home buyer credit so as to reduce the incentive for people who can't afford homes on their own to buy them?

Why not just require banks to raze any house that has been on their books for 18 months and the defaulted mortgage was backed by the government.

mrredskin said: obviously those arguing that 3.5% is way too low are at least in their 30's and have some built-up equity.

one of the only ways i was able to buy my house was because of the 3.5% FHA loan. i'm an engineer with a decent amount of job security and a good salary but didn't have enough money saved for a conventional 5% or greater, in order for me to still live comfortably for several months after the purchase. if it were a minimum of 20% down, i would have had to wait 2+ more years before buying a house.Devil's advocate: would renting for 2 more years have been that much of a hardship?