Insanity Defined: Feds Unveil Plan to Help High-Risk Homebuyers Take On Massive Debt. Again.

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"Low Down Payments Are Coming Back," screams a headline from The Wall Street Journal today. The story details two steps federal regulators apparently have in the works:

On Monday, Federal Housing Finance Agency Director Mel Watt announced that mortgage-finance companies Fannie Mae and Freddie Mac would start backing loans with down payments as low as 3%.

And on Tuesday, three federal agencies approved a loosened set of mortgage-lending rules, removing a requirement for a 20% down payment for a class of high-quality loan known as a "qualified residential mortgage."

Loans with little to no down payment were a common feature of the lax lending practices that were prevalent during the housing market's bubble years.

Of course, those bubble years eventually came to an end, causing an economic meltdown of jawdropping magnitude. Presidents George W. Bush and Barack Obama responded by running up the national debt from $10 trillion before the recession to more than $17.5 trillion today. And "experts" everywhere laid the blame at Wall Street's feet, lambasting the banks for making reckless loans they should have known were destined to go bad.

Now, in the wake of that historic lending-bonanza-turned-financial-crisis, federal regulators are concerned—but not that we might still be incentivizing people to take on more debt than they can realistically service. No, federal regulators' concern is that the banking system isn't making it easy enough for people to take out expensive mortgages.

Luckily, they have a plan to help thousands of additional high-risk borrowers purchase homes they can't afford. Sound familiar?

Comments

[F. Stupidity, Jr.]

I can't see one thing wrong with this plan.

[Doctor Whom]

Neither can I. Government policies had nothing to do with the last bubble. That's what everyone keeps telling me.

[Bean Counter]

A hundred maybe, but not JUST one.

[LarryA]

This time The Right People will be in charge.

[RussianPrimeMinister]

It worked so well the first time!

[waffles]

"Fuck yes, smear it on my titties!", screamed every realty agent at once.

[Riven]

This is why we can't have nice things.

[Aresen]

History repeats itself.

The first time is tragedy, the second is comedy.

[Jesus H. Christ]

Gawd, I hope so. We totally missed out on selling our home for double its value the first time around, then waiting for the crash and picking up a nicer home on the relative cheap. This time, I'm going to do it right.

Come on, fuckers! start signing those loan papers!

[perlhaqr]

This is kinda the, erm, second or third thought I had after reading the story.

"Maybe it'll drive another fucking bubble and I can at least get out of my house."

*shrug*

[InfernalBear]

How is not requiring a down payment a problem? As long as the loan-to-value is kept in check I don't see the issue if this is the only "loosening" done. There are plenty of people who have no problem making a $2k/month mortgage payment but are unable to scrape together a 20% down payment. The problem comes into play with interest-only and balloon loans allowing people to borrow much more than they can afford while kicking the debt can down the road.

[MP]

no problem making a $2k/month mortgage payment but are unable to scrape together a 20% down payment

Those people are still a credit risk because they have no skin in the game.

[Aresen]

"No skin in the game".

Exactly.

If they don't make a single payment, they get six months to three years worth of free housing.

The mortgage lender is not only out the interest, but the cost of foreclosure and likely the property tax as well.

[The Laconic]

You're kidding, right?

[MegaloMonocle]

How do you get a loan to value ratio much less than 100% if there is no down payment?

At best, you might get an LTV under 100% if the house is underpriced. But that is very rare.

No down payment usually means LTV is 100%.

The other thing a downpayment shows is that you have some savings, showing some fiscal discipline, which is (or should be) very important when underwriting a loan.

[Brett L]

The part where the down payment represents that the borrower has demonstrated the ability to accrue money in excess of their spending to the tune of 20% of the home is important. (And yes, I understand that there is often a generational wealth transfer where the parents/grandparents demonstrated this ability, but that's just another resource that the lender can depend on the borrower to tap rather than default.)

[Bill Dalasio]

How is not requiring a down payment a problem? As long as the loan-to-value is kept in check I don't see the issue if this is the only "loosening" done.

Because at day one, the loan-to-value will be 100%. If the value of the property falls, the loan is more than the property is worth. At that point, there's little if any reason for the borrower not to default.

[F. Stupidity, Jr.]

The problem comes into play with interest-only and balloon loans allowing people to borrow much more than they can afford while kicking the debt can down the road.

Yeah, but who would do that? With the last crisis so fresh in our minds, no one's gonna make that mistake again.

[Aresen]

Exactly. Also:

With the last Portugal/Ireland/Greece/Spain debt crisis so fresh in our minds, no one's gonna make that mistake again.

[Pro Libertate]

Governments appear to love bubbles. They aren't happy if they don't have at least one floating around. Like infants, I guess.

[Aresen]

Considering that they always get lots of tax money while the bubble is inflating, get to make scapegoats when it collapses and get to use the collapse as an excuse to expand their powers and impose new taxes, can you blame them?

[Pro Libertate]

No. We do everything possible to reward the worst possible behaviors. Naturally, they reoccur.

[Cytotoxic]

"Well the economy's in trouble and Yellen is iffy on giving me more free money. Time to juice housing again!"

[The Late P Brooks]

A chicken in every pot, simmering on a Viking stove.

Three Cadillacs in every garage.

Envy will be a thing of the past.

[UnCivilServant]

If you have not bought thre cadillacs from government motors, you will be penaltaxed!

[Bill Dalasio]

And when the bubble collapses, I think we know exactly what these bastards' mantra will be - "We didn't have enough regulation to stop these Eeeevilll Wall Street Bankers(tm) from destroying our lives!".

Well, maybe after the screwing they got from the government for taking over the failed institutions that the government itself insisted that they had to acquire or it would be "TOTAL AND UTTER FINANCIAL DOOOOMMM!!!", the banks will have the good sense this time to tell the Treasury and Fed to go fuck themselves.

[PM]

Well, maybe after the screwing they got from the government for taking over the failed institutions that the government itself insisted that they had to acquire or it would be "TOTAL AND UTTER FINANCIAL DOOOOMMM!!!", the banks will have the good sense this time to tell the Treasury and Fed to go fuck themselves.

"Nice business you got there. Be a shame if something were to happen to it."

Somehow I doubt it.

[Bean Counter]

So, I let the government create a housing price bubble, wait until they get my condo overvalued by 50%, sell the thing and invest the profit. When the bubble bursts, I'll get the government to give me a tax break for buying my place back at half what I sold it for. This is how a little guy can become a crony capitalist!! Thanks, Barrack Obush!

[MegaloMonocle]

I'm interested in your ideas, and would like to subscribe to your newsletter.

[Invisible Finger]

sell the thing and invest the profit.

You think the government will let you keep most of the profit?

HA HA HA HA HA HA HA HA HA HA HA HA HA

[Bean Counter]

Actually, the profit would be far less than the exemption for selling a home you have lived in for the specified time. Since changing that would require pissing off old people who own homes and VOTE, I think I'm pretty safe in assuming I'll keep my profit. The state likes to confiscate the profits of people who actually create wealth and provide useful services. That's the advantage of crony capitalism.

[Brett L]

See, I was going to just sell my house and take a loss since I'm not underwater anymore if/when I move next year. Now, I'm thinking of refinancing my mortgage into a 5 year ARM, renting the house for $300 more than the cost of carrying the loan for 3 years, and then putting $5000 into fixup at the top of the next bubble and getting out "ahead". (There's actually more money than $5k, but the AC or an appliance will break while I'm renting. This is the conservative plan.)

[Invisible Finger]

Thank goodness we have Dodd-Frank to ensure that we prevent our economy from never being based on malinvestment again.

[Invisible Finger]

The whole reason to avoid LTV's from 80%-250% is that property tax increases will ensure the monthly payment goes up annually, regardless of how low the goddamned fixed interest rate is.

[Pro Libertate]

When we pay off our residence mortgage, we'll still be paying something not all that much lower than renting an apartment. Forever. Taxes and insurance together are absurdly high in my book. Be one thing if that were all the tax I paid, but, of course, they rape my income as well.

[NotAnotherSkippy]

And you still don't pay your fair share.

[Brett L]

Really? I mean, granted I live in a small home in the only part of FL that isn't growing like a python in the Everglades, but I think my taxes and home owners insurance run $2200 a year. Of course, I'm 30 feet above the water table and 30 miles inland, too.

[The Late P Brooks]

We would have gotten away with it, too, if not for those meddling kids predatory lenders!

[NeverBetter]

The article is flat out WRONG. Fannie and Freddie have NOT been required 20% down in decades. They have only been requiring 5% down since the meltdown so long as you have mortgage insurance. All this does is move the Loan to Value from 95% to 97%.

FHA is a 3.5% down payment loan and has been for years.

VA is a true 100% loan and it has one of the lowest default rates due to VA requiring residual income (money left after all of your bills are paid)

[kbolino]

The article may be wrong, but you'd have to address what it actually said first.

[Bubba Jones]

This is why I invest in REITs.

[BDub]

World's largest face just met with the world's largest palm.

[Scotty2hottie]

The author seems to want less regulation because the regulation is too lax, but that doesn't make much sense. There needs to be regulation in the financing industry otherwise it's too easy to engage in predatory lending and sell the note to outside investors, which passes the risk. I relate it to the SOX act with the stock market, it's easy to screw people so we need some guidelines. Then the market can function without questioning each underlying note.

Basically, instead of deregulation I think we need stricter regulation to avoid constant bubbles. But then again, bubbles are great if you can identify them and act in your own best interest.

[Obese American]

I'm a mortgage broker in California. The feds could not have picked a worse way to improve access to loans.

Remember a few weeks ago how Bernanke said he couldn't qualify for a loan, despite making $250K per speech? That's because of the guideline that says a self-employed borrower can only prove his income by 2 years tax returns, and since Bernanke just became self-employed in 2014, he won't be able to qualify until he files his 2014s.

Did the feds change that guideline at all? Nope. I have dozens of self-employed people who make a shit-ton of money, but are "creative" on their tax returns so that they don't give it all to Uncle Sucker. Nothing illegal, but they run a lot of expenses through their businesses to lower their AGI.

These people have millions in the bank, FICOs over 760, and loans to value under 50%. And they can't qualify for diddly, because the Feds have scared any other investor into adopting their own guidelines or else face massive regulatory investigations.

Instead, they go to 97% down and lower FICOs, so that the same people who ruined the market the last time can do it again. If it weren't so typical I'd be upset.

[Aresen]

That is like saying you know Enron is a junk stock, but you will manage to sell before the bubble bursts.

[perlhaqr]

It's kinda depressing what's available for relatively dirt cheap right now.

The place I'm living in right now, purchase price was $200k. Home values in that neighborhood have, in the intervening 8 years, pretty much followed the amount of principle we have left on our loan as it decreased. The place directly across the street, owned by a very nice old couple of whom the husband recently died, and the wife who now lives with her kids up north a ways, which is A.) bigger than my house, B.) better landscaped, and C.) on a larger lot, is on the market for $150k. And is just sitting there, at that. :-/ Which probably means that we're underwater on the loan again, if we were to get re-appraised.

[Pro Libertate]

Makes me want to rush out and buy five houses. . .and wait.

[Aresen]

The trick is discipling yourself to get out rather than holding on for 'just a little more.'

Baron Rothschild once said he made a fortune by selling too soon.

Very few people can really manage that trick.

[Pro Libertate]

I need me some Section 8 homes and some mobile home rentals.

[Aresen]

I don't know what the regulations on landlords are like in the US, but I would never, ever be a landlord in Canada.

[Pro Libertate]

It's scary here, too, but how scary depends on the jurisdiction. There are some places where eviction is pretty much up to the tenant.

[End Child Unemployment]

In Seattle, it takes 3 (maybe 4) desist letters to tenants before you can lawfully evict them for smoking in your unit, against a no-smoking provision in their lease. Someone can do a tremendous amount of damage to a structure in that time.

[Pro Libertate]

Amazing. My effing property, get the fuck out.

It's distressing how much people can just vote themselves rights to other people's possessions, all while bearing none of the risk.