Fannie Mae and Freddie Mac

Put Just 3 Percent Down and Own a House! (Or, Fannie Mae Fails to Learn From Its Mistakes)

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Foreclosure
joelogon / Foter / CC BY-SA

Submitted for your approval, from a Fannie Mae press release dated December 8:

WASHINGTON, DC – Today, Fannie Mae (FNMA/OTC) announced an option for qualified first-time homebuyers that will allow for a down payment as low as three percent. Building upon Fannie Mae's successful lower down payment program offered through state Housing Finance Agencies, the 97 percent loan-to-value ratio (LTV) option will expand access to credit for qualified first-time homebuyers that may not have the resources for a larger down payment.

This makes official a federal scheme Stephanie Slade noted as pending back in October.

For those with short memories, the Community Reinvestment Act which encouraged home ownership at all costs, including financial prudence, is closely implicated by economic research in the great housing crash of a few years ago. Economists Sumit Agarwal of the National University of Singapore, Effi Benmelech of Harvard, Nittai Bergman of the Massachusetts Institute of Technology, and Amit Seru of the University of Chicago wrote two years ago:

Our empirical strategy compares lending behavior of banks undergoing CRA exams within a given census tract in a given month to the behavior of banks operating in the same census tract-month that do not face these exams. We find that adherence to the act led to riskier lending by banks: in the six quarters surrounding the CRA exams lending is elevated on average by about 5 percent every quarter and loans in these quarters default by about 15 percent more often.

Fannie Mae and Freddie Mac (which also joins in the new round of 3 percent-down fun) feature prominently as major promoters, under HUD direction, of the federal government's "affordable housing" scheme to stick everybody under a roof that they couldn't necessarily pay for. They lobbied and arm-twisted banks to make the high-risk loans that led to such an…interesting result (by which I mean meltdown).

Now, they're back at it. But it will be different this time, just because.

NEXT: Jonathan Gruber is a Liar. Was He a Liar Under Oath?

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  1. These still aren’t 100% or interest only loans. Nor are they no docs loans. You will have to have a minimal credit score and probably no tax problems.

    1. They are 97% LTV until the 3rd year when they will be 110% LTV. IOW, the loans won;t default, but they’ll still be underwater.

      But dammit, someone has to pay property taxes and Blackrock doesn’t want to do it anymore.

  2. It’s not even a favor. Financing more for 30 years is epically dumb. If you don’t have 20 percent down, then don’t buy.

    1. Well, if you put 20% down you have that much more to lose when you stop paying the mortgage.

    2. Why do you hate America?

    3. Financing more for 30 years is epically dumb.

      Get the 30-year at a low rate and pay extra on principle when possible. Helps some reasonably solvent homes make it through the lean times and there is nothing dumb about this, FM.

      1. Talking about financing more than the home value…

      2. Interest rates on 30 year loans are significantly higher, also you have to pay Private Mortgage Insurance until you reach 20% equity, which amounts to another 1% or so interest.

        All of that money spent on PMI and interest is money NOT getting put on principle.

        It’s still a rip-off.

        1. If your credit score is above say 690 your interest rate will be remarkably low considering where they were 20 years ago, HazelM.

          PMI can be paid off in about 3-5 years. And if rates are still low you can refinance afterwards.

          This isn’t the best tactic for a home-buyer on their second or third home but for a first-timer who has great credit and a decent job credit is cheap and should be used accordingly, in my view and experience.

          1. If a first-time has great credit, it’s probably because they are financially smarter and already know that 30-year mortgages are kinda not worth it.

          2. You’ll still get an even lower rate if you put 20% down. If you’re a first time home buyer with a decent job and great credit, it shouldn’t be that hard to save up enough to make a 20% down payment, get out of PMI AND get a lower interest rate.
            Isn’t that the sort of prudence that got you a good credit score in the first place?

            1. Also go for a 15 year mortgage as Invisible Finger suggests.

              I’m not going to buy unless I can put 20% down and afford payments on a 15 year mortgage.

              You can always refinance into a 30 year mortgage later, but it’s best to get some equity into the house and get principle paid down as quickly as possible.

            2. It is wise to avoid PMI. I totally agree with that in ideal circumstances. But there is always a cost to paying off a 150k investment early if you have the normal household income and kids.

              1. In my area it’s closer to a $300K investment. Paying it off quickly is a matter of survival.

                1. You might be able to get higher returns right now with simply investing the extra income rather than paying down the mortgage which is probably at 4.5% or so.

                  1. You *might* but the 4.5% return is a guarentee. Stock market could crash again. Plus the real estate market might provide a better return than the stock market.

      3. 5% interest x 30 years = 150% total interest.

        6% interest x 15 years = 90% total interest.

        Even at a LOWER rate a 30-year mortgage is still stupid.

        Even if you don’t plan on being in the house for more than 15 years, self-amortization means you’re still paying more interest in the first 15 years on a 30-year than you do in total on a 15-year.

        1. Don’t try this on an average 160k home in most areas of the country if you exist a normal dual-income (married) and have children.

          Your retirement will suffer. Period. No two ways about it.

          1. How in the fuck will one’s retirement suffer?

            1. Money that should go to retirement, emergency fund, and kids’ college education will get siphoned off into early mortgage payments. How can it not, pray tell? IF your household income runs 55-80k.

              Now some of use are doing much better than this and that’s a different story but in the long run middle-class folks should use the 30-year to their advantage.

              1. So? You can borrow against the home equity later.

                1. True, but why? You don’t know what the market will do ‘later’.

                  1. You don’t know what any market will do later. You do know that every dollar you pay in principle gives you a 4.5% return.

                    The real question is what is the likelihood in the near term that other investments will do better than 4.5%. If stocks are at a high and due for a correction, the 4.5% might be a better place to put your money.

                    1. Your property could lose value, dear, depending on the area- which affects your investment potential. Setting aside always-hot real estate areas (which are narrow and mostly commercial or super-rich)- many parts of the country have struggled with the loss of home valuation. Ask any appraiser this. Only in the last year to year-and-a-half have home valuations started to balance out or improve.

                    2. You don’t know what the market will do ‘later’.

                      You don’t know what the market will do ‘later’.

                      Those sound like reasons to do the 15 instead of the 30.

                    3. The other thing people forget is the “deferred income tax” retirement plan in all likelihood means you will pay income tax in a higher tax bracket later than you would if you paid it right away. So your investments also have to make up that deferred tax penalty.

                      Back when a 30-year treasury was giving a 5 or 6% annual return you probably were making up that deferred tax penalty rather easily. Not so today – the tax penalty is roughly the same but the 30-year treasury return no longer covers it.

                      And who are we kidding anyway? Most people get30’s so they can get as big a house as they can afford, they skipped the 15 because they’d have to get a smaller house. THAT’s the investment they’re making with the 30.

              2. Your extra investment return is totally countered by the extra interest you pay. You can play the public pension game of expecting unrealistic annual returns if you want.

                So you either invest some longer + pay more interest longer OR invest a little now and a lot more later and pay less interest.

                One is less of a gamble than the other. Of course, YMMV.

        2. Based on a $150,000 loan:
          A 5% interest x 30 year loan would result in a total of $289,882.80 in payments, of which $139,882.80 or about 48% of the payments paid as interest, or equal to about 93% of the amount borrowed.
          A 6% interest x 15 year loan would result in a total of $227,842.20 in payments, of which $77,842.20 or about 34% of the payments paid as interest, or equal to about 52% of the amount borrowed.
          But yes, you do pay more interest in the first 15 years of a 30 year loan, but then you are carrying the loan for an additional 15 years during which time you will pay less interest.
          Take into consideration the value of the currency over the period of the loan. Over a 30 year period the dollars being used are worth about half of what the dollars borrowed were worth, actually the Fed and more importantly, the Federal government, hopes they will be worth about 55 cents.

    4. I’m totally about to do an 80/10/10…I don’t really consider myself to be that financially irresponsible.

      1. What is 80/10/10

          1. No, it’s just a different way to pay extra interest, just like PMI. Calloing it something else doesn’t change the fact that banks need some means to get paid for taking on extra risk.

            1. Beats paying PMI since you’re at least paying down principle.

              1. Not necessarily. You have to calculate whether the extra interest on the extra 10% is more or less than PMI.
                Whichever one is less is better.

                1. Interest rates are really low right now…

      2. But how do the credit bureaus consider you?

          1. FICO score is…?

      3. Try a balloon note instead.

  3. Do whatever! What possibly could go wrong??!! Carpe DIEM and shit!

    WOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOO!!!!1

    *snorts immense line of coke like it’s the fucking 80’s in MIAMI, man!*

  4. Jeez, not again. We already have an investor bubble in residential real estate. Need we inflate that even more?

    1. Perhaps we shoud further inflate the education bubble instead.

      1. Thank god we have Elizabeth Warren to address both of these critical issues.

        1. Thank god we have Elizabeth Warren to address make both of these critical issues much worse.

          1. Your sarcasm meter is broken.

      2. Perhaps we could combine the two bubbles into one mega bubble. Homecation?

        1. Finance your education with a home equity loan guaranteed by the government.

          1. This is a brilliant idea and I wish to subscribe to your newsletter.

  5. I could put 100% down on a house.

    Unfortunately, that house would be in Detroit.

    1. The commute from detroit is a bitch. It isn’t worth it.

    2. Honestly, if it weren’t for the Detroit City government, investing in Detroit would be a great idea.

      The city has a good location at the junction of a river navigable by large ships and a land transportation corridor. It should be as natural a center of commerce as Istanbul.

      However, given the City government, it makes marginally less sense than investing in Putin’s Russia. (The kleptocrats in charge of Russia are more rational, so they get the nod.)

      1. Yeah – it’s almost like the rover location and transportation corridor are the REASONS IT ORIGINALLY GREW TO THE MONSTER IT BECAME.

        Till the city gov drained the life from it over the course of the last century….:( I haz a sad…

    3. And the property tax bill!

  6. Good news – that means that foreclosed house in my neighborhood will sell and won’t be empty.

    Bad news – the people buying it will probably also get foreclosed on.

  7. People should treat their home purchase like 2014 sex at the local college campus.

    1. So I should turn around and accuse the bank of rape because I felt pressured into signing the forms?

      1. If you have been paying close attention to Salon, yes.

      2. Only if your mortgage rep was a gorgeous brunette and she stabbed you in the eye with a pen.

  8. Two predictions:

    1) They will continue to loosen the rules until we have another housing bubble. (“This time will be different.”)

    2) When the whole thing blows up again and creates a multi-trillion dollar mess, the left will blame “deregulation” and libertarians.

    1. No, this time it will be different. People see it coming, and the notes will be risk-discounted, so the bubble won’t get as big, money-wise, and when it pops there won’t be as much deflation.

      A cluster of error in housing is much more benign to begin with than in capital investments. Most of the financing of purchases is of existing bldgs., not new construction. To the extent it finances construction of new homes or extensions, the loss in value when borrowers default is much less on avg. than when capital improvements go sour. In the latter case, widget-making machine values can decline to nearly 0. Homes, OTOH, always look good to someone. There may be a few precipitous write-downs based on geography, as certain overbuilt areas don’t have the resale value that was anticipated, but overall the misvaluation is not so severe.

  9. And of course when this scheme goes to shit it won’t be the government’s fault. “Teh evul Wall Street!!!! DerpDerpDerp!!! Occupy!!!”

    1. My favorite line from the last housing bubble uttered by many a leftists-” Nobody could have seen this coming.”

      I could name a couple dozen people off the top of my head who absolutely saw it coming, one of which was a congressman who seemed to be on the news a lot.

      1. “Nobody could have seen this coming.”

        Except hedge fund manager John Pauson who made about $5 billion in one year shorting subprime mortgage backed securities.

    2. In some sense, they will be right.

      Because the bankersters on Wall Street are going to collect a bundle in fees and bonuses on this. That’s what crony capitalism is all about.

      It is the ordinary taxpayers who will be screwed.

    3. Indeed,

      Mention anything about the CRA being a factor in the last fiasco, and the leftists start screeching that it had nothing to do with it.

      1. I believe Tony’s go to when you mention that is: RACIST!!!!1!!!11!!

  10. Great, now we have a cyclical/bubble economy like before, except now without meaningful economic growth between downturns. Worst of all worlds.

    1. “Mission accomplished!” 8-(

  11. I bought my first house this way. Put down $7,500 on a $200k house.

    1. How much did you pay per month in PMI and interest compared to what you would have paid if you put 20% down?

      1. The PIM was ridiculous…but I ended up building a bunch of equity in that house whereas I would have built up zero renting. And my mortgage payment was a couple hundred less than the market rent for that house. I came out ok.

        1. Also need to factor in property taxes.

          The formula is something like interest+pmi+taxes < monthly rent

          1. Well yeah, by “mortgage” I’m talking about the whole package.

          2. It’s principle+interest+pmi+taxes < monthly rent

            1. Actually, Hazel’s formula is right.

        2. As long as you can keep your job (and get raises) you usually do come out OK.

          People often take the 30 because the monthly payment looks more doable should they lose their job.

          Ultimately, the strategy should be having zero interest payments by age 52. Whatever mortgage length and down payment gets you to that goal is OK. That is the general age at which wages peak. The last thing you want is to have to cover interest payments while your income is falling.

    2. There will undoubtedly be people who benefit from it: People who buy while the prices are still rising and ‘stick it out’ when the bubble deflates so that they eventually do own their own homes.

      There will also be people who buy at or near the top then find their equity wiped out as the bubble bursts and decide to walk away.

      Unfortunately, the former will be stuck paying the bills for the latter.

  12. At least it doesn’t damage the economy as much as it would if they were induced to make capital investments.

    1. And it won’t even damage the economy as much as last time. People won’t overvalue those notes to the degree they did before.

  13. To determine if someone is an adherent of the regulatory fallacy ask this question: Do you believe that given the degree that the tax burden was shifted from the rich to the middle class, was there any type of regulatory policy which would have prevented the financial crisis? If they answer yes, they are adherents to the regulatory fallacy

    A slight variation on the regulatory fallacy is the there is a miniscule grain of truth to it. Financial innovations such as credit default swaps and regulatory changes like repeal of the Glass-Steagall Act slightly affected the exact timing of the onset of the depression. However, once the tax burden was shifted from the rich to the middle class it was just a matter of time before middle-class consumers became unable to absorb the increased production and service the debt that accompanied the overinvestment. Different regulatory policies might have shifted the bubble more towards commercial real estate rather than residential real estate or visa versa but the outcome would have been similar.

    Blaming regulatory policies and financial innovation for the depression is like blaming the armaments manufactures and soldiers for World War II. In order for the war to occur there had to some weapons made and some soldiers to fight. If those particular armaments manufactures and soldiers were not available, others would have….”
    http://seekingalpha.com/article/1543642

    1. Perhaps I’m missing something, but aren’t the “rich” paying a higher share of taxes now than in the recent past?

  14. The stupidity repeats! Like communism and socialism, which have failed time and time again, all the way back to the early American colonial days…

    “This time it will work! We know it will!”

    Reminds me of one of those house hunting shows where a couple in Colorado, IIRC he was a college professor and she worked at a research lab or something like that, could only get an interest only loan to buy their dream cabin. (Which ended up needing a major overhaul on the wooden deck. Pays to have an inspection before signing the loan papers!)

    Two high five to low six figure incomes, no dependents and all they could get was a stupid interest only loan?

    Why are such loans allowed? The principal never gets paid down. Renting or even leasing would be a better deal.

    One of the worst things ever allowed to happen in the USA is property tax. The establishment of property tax abolished real property ownership.

    What happens if you don’t pay the rent on an apartment or house? You get evicted.

    What happens if you don’t pay your property tax on land you “own”? You get evicted and the government you were supposed to pay the tax to “sells” the property to someone else.

    Property tax = rent! It’s rent without the benefits of the landlord being responsible for repairs etc.

    Where’s the movement to abolish property tax and restore real property ownership?

  15. I would advise ANYONE to RUN FAR FAR AWAY from any loan that Fannie Mae is involved in. Fannie Mae, in collusion w/Bank of America, Green Tree, and their “substitute trustee” lawyers are fabricating ta da endorsements and forging owner’s names on mortgage note to fraudulently foreclose on homeowners across the country. Run, don’t walk, away from these evil entities. Go to your local credit unions instead. DO not do business w/them as they will lie and cheat you to rob you , they will lie to you about a modification if you find yourself unemployed or facing unforeseen medical bills or some other unforeseen circumstances that made you fall behind on your mortgage. They will lie to you and they will committ fraud upon the courts and they are doing it in massive numbers. They are forging documents. They don’t care about you, they only care about their almighty dollar and they will do whatever it takes, illegal or not. Save your soul and run far far away.

  16. Invisible Finger
    A 5% interest x 30 year loan would result in a total of $289,882.80 in payments, of which $139,882.80 or about 48% of the payments paid as interest, or equal to about 93% of the amount borrowed.
    A 6% interest x 15 year loan would result in a total of $227,842.20 in payments, of which $77,842.20 or about 34% of the payments paid as interest, or equal to about 52% of the amount borrowed.

    1. Right, his point stands.

      And In reality, 15 year mortgage interest rates are typically 1% or more LOWER than 30 year. A 30 year mortgage is a bigger risk for the bank.

      When you take out a 30 year mortgage your paying a HIGHER interest rate, AND taking longer to pay it back.

  17. I was employed at HUD of 27 years. I recommend everyone read Gretchen Morgenson’s book “Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Created the Worst Financial Crisis of Our Time.”

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