Want A New Home? All You Need Is Pocket Change.

Remember that pilot program in which a handful of states offered government-backed, $1000-down new home loans? Turns out you can get into one with less than a grand—quite a bit less. CNBC reports on one couple taking advantage of the offer who managed to get into a house for a mere 67 cents. (At that point, why not just give the home away for free?) Backers argue that the program's strict underwriting standards and the fixed, long-term mortgage rates it offers  mean it won't be simply be a one-way ticket to default for most of those who sign up. But as John Carney says, that's not a terribly persuasive argument:

Adjustable rate loans are not the primary drivers of defaults—the primary driver is the combination of borrowers who have negative equity and expect that the value of their home will not appreciate soon. This means that no money down home loans are particularly dangerous—regardless of how vigorously lenders counsel homeowners or screen for credit scores.

Comments

[Tim]

If you put no money down, what's your incentive not to walk away?

[Invisible Finger]

It doesn't even matter if you put money down. The primary driver of defaults is the fact that people aren't going to throw good money after bad. Far too many economists forget this basic fact, partly because they are of the mind that "if we just spent more money our scheme would have worked."

[Jonny Scrum-half]

But how can you have "negative equity" if you put no money down?

[Alice Bowie]

Simple, You buy a house for $500,000 and get a Mortgage for $500,000. The value drops below the amount owed on the mortgage.

[john]

Would you liberal concern trolls please put a fucking sock in it already? We're not ever going to buy into your propaganda.

Jesus fucking Christ!

[Mary]

Jesus Christ Almighty.
A mouse ran up my nightie.
It bit my tit
and made me shit.
Jesus Christ Almighty.

[john]

Holy mothertyfuckity Christ almothefuckingmighty! Another goddamned liberal fuckity concern troll, thinking a nursery rhyme somehow makes their shitty brand of libertarianism any less shitty.

Hey Mary? Do me a favor. Go suck your beloved Obama's dick.

[Mr Whipple]

God grant me the serenity
to accept the things I cannot change;
courage to change the things I can;
and wisdom to know the difference.

[Lionel Hutz]

The printers screwed it up, its supposed to read:

No, Money Down!

[nodrog]

"Negative equity" means that the market value of the house is less than the amount the owner owes on the house. So, if you buy a house with nothing down and housing prices take a dive shortly thereafter, you will have negative equity.

[nodrog]

The above was intended to be a reply to Jonny Scrum-half. However, subsequent to posting, I realized that Jonny was probably being sarcastic or ironic or something. Sorry to miss the obvious - I am not quite awake yet.

[robc]

You dont even need a dive. If you start with nothing down and roll the closing costs into the loan, you start with negative equity.

[SIV]

Thank you for taking care of that.

[Alice Bowie]

Hey there,

To all of those who are $100,000+ under water and don't have much money invested into the property, the best thing for them to do is walk away.

It is a sound business choice in which an individual should weigh between what is worth more:

A> Your credit score
B> Your $100,000+

[robc]

Sigh...once again, not in a recourse state.

In a recourse state you owe the difference just like when your car is repossessed (although whether the bank comes after you or not is another matter).

[robc]

Of course, the kind of states where you could end up 100k under water are all either non-recourse or effectively non-recourse states.

Correlation? Causation?

Yes and Yes.

[Invisible Finger]

I dunno about that. Every state has cities and town with slums. When property values plummet, you can be underwater. The terms of the mortgages don't really make much of a difference to market-clearing values of the properties.

[Alice Bowie]

Actually, in my state, New York (also true for New Jersey), these are Single-Action States. That is, the Bank can only do one of the two
A> Sue you for the amount owed without foreclosure (This takes over 5years and banks almost never go this route. Especially in today's climate. It may be very easy to find sympathetic jurors.)

B> Foreclosure where the bank gets the property AND THAT's it.

If you are in a non-recourse state with no single-action...you are screwed.

[Alice Bowie]

And, there's always Bankruptcy.

[robc]

Yep, but BK doesnt help if you have the 100k sitting in the bank. But, as I bought my house with 50% equity, its not an issue of mine.

Oh, and you arent "screwed". You owe the bank that money (unless your contract says otherwise, like in non-recourse states). The problem with "single-action" states isnt that, its that option A takes 5 years. Look, NY, if you want to be a non-recourse state, be a non-recourse state. Dont force it via court delays.

[R C Dean]

In a functional market, rather than one that has been distorted via de facto nationalization of the mortgage industry:

(1) Loans in non-recourse states would be more expensive (i.e., higher interest rates and/or more expensive mortgage insurance); and

(2) Low-down-payment loans would also be more expensive.

But we don't have a functional mortgage market, so the rate spread between good loans and risky loans isn't nearly what it should be. With the wrong people (taxpayers, good borrowers) funding the difference.

[robc]

Agreed. Also

(3) Down payment requirements and/or interest rates would have gone up as housing prices separated from the long term trend line. When the C-S index was about 180, banks should have been requiring 50+% down, especially in non-recourse states. Which would have killed the bubble before it inflated.

[Alice Bowie]

agreed.

[Alice Bowie]

I really agree with you.

You would think that the investor would have looked for more protection in non-recourse or single-action states. That is, bigger down payments and higher interest rates...Which would have motivated the state legistature to change the recourse actions of the state.

[Amakudari]

Well, as someone who worked in a large bank through a lot of 2007-08 mortgage issues, I can honestly tell you that many lenders in California were convinced that no rate was too low as long as it was above their cost of funds. If the borrower was underwater, who cares? They could just sell their home at a profit. Until then, the lender would collect the spread. And those low foreclosure rates were borne out by recent history: at Golden West, for example, from the S&L debacle through 2007 the CFO would personally review and sign off on every foreclosure.

And these were often portfolio lenders, so FNMA/FRE had nothing to do with it. Non-recourse state, low/no-doc, low down payment (often with an attached HELOC to make it 0-10% down), yet you still had Countrywide (now Bank of America), Golden West (now Wells Fargo) and Washington Mutual (now JPMorgan) competing to offer the lowest teaser rates and terms.

That's not to say the market wasn't distorted by government, but there were private lenders who were making these mistakes without interference. You can argue that cheap FHLB funding exacerbated ARM lending, that deposit insurance subsidized them, and that the bailout made everything worse by socializing those losses, but I think underwriting standards would have remained terrible.

[robc]

How the fuck could they think a 180 C-S (and even higher in some CA markets) was even remotely fucking sustainable?

Technically, CA isnt a non-recourse state, but much like NY it is virtually impossible to actually get recourse from the courts.

[Amakudari]

I talked to an exec once when I moved out to the Bay, and I remarked at how ridiculous housing prices were. She tsk-tsked and said that it was a premium paid for the overwhelming attractiveness of the Bay Area. Truly unlike anywhere in the world, and there's no way to understand the premium until you lived there. In other words, the people believed it because they were fucking retarded. I don't make the rules here.

Well, no, technically it is a non-recourse state, but not all loans qualify. It doesn't apply to refis or HELOCs, for example. In any case, I'm talking about the de facto reality.

[Mike Laursen]

It is an attractive place, and there is a premium, but a fucking loan executive should have had a pretty damned good idea how much that premium was worth in cold, hard dollars. That exec was a moron.

[Mike Laursen]

Predatory stupidity.

[Mr Whipple]

Why should residential be any different from commercial? Look at some of the LTV ratios of the REITs. Some of them are walking away, but yet still making huge profits. So, what do the banks do? Sell more bad paper, what else? Either that, or get bailed out by the Fed. For now, they will just mark-to-myth, or move them off-balance-sheet. Simple. Legalized accounting fraud is a Many-Splendored Thing.

[Alice Bowie]

There's actually a website called http://www.youwalkaway.com

[GHrtasuy]

I sold 2 houses at the Home Credit expiration deadline last November. Both purchasers put $0.00 down, but met FHA's down payment requirement by agreeing to pay me $5,000 more than my asking, but having me pay them $5,000 at closing to use as their down payment.

I couldn't believe this circular cash flow was kosher (I'm law abiding) and made sure it was itemized on the closing statement. The lender's agent did not object and everyone involved said it was SOP.

[R C Dean]

That tells me that they had an appraisal that the house was worth $5K more than your asking price.

The appraisers are supposed to be the safety check on abuse of the home credit system.

Guess not, huh?

[PR]

What lenders really need is a way to quantify where someone is on the Alice Bowie scale of personal responsibility.

[help stop foreclosure]

Do you guys have a facebook fan page? I searched for one on facebook but couldn't find it, I'd love to become a fan!