For Many, 20% Down Payment Is All That’s Left

Posted on November 11th, 2008 in Daily Mortgage/Housing News - The Real Story, Mr Mortgage's Personal Opinions/Research

This news has been a long time coming and is very damaging to the housing market.  This announcement from Wells is the first I have seen but others should follow suit this week.

I have done numerous reports on the mortgage insurers and how it does not matter what Fannie and Freddie do with respect to loan-to-value, its all about what the mortgage insurers will do. See stories below for how we got here.

In CA (other states as well) due to mortgage insurer ‘challenges’, the MINIMUM credit score required to do any loan (Fannie/Freddie included) over 80% is now 720 from the previous 620.  I am not sure the percentage of folks with over 720 scores vs. under but regardless, this will take a massive number of people out of the market.

Credit scores are dropping across all demographics very quickly due to the banks chopping revolving (credit card) and home equity loan credit limits dramatically in the past few months.  In most cases, banks are dropping the credit limits to right above what people owe. This hurts credit scores badly because a large portion of your score is based upon total credit available vs. used. For example, if you have a $1000 credit limit and you use $299, it is under 30% which is optimal. The next tier is 50%. However, if you have a balance of $501 through $999, your will can be hit hard for each revolving line you have in this condition. So, by banks chopping lines they are essentially hurting the consumers ability to borrow just as credit guidelines are tightening. This is as bad as it gets.

Additionally, putting 20% down is a very rare thing especially in this housing market. Over 50% of all sales came from the foreclosure stock and move-up buyers are not driving force – it is first-time home buyers, renters and investors.  While investors usually have to put down at least 20%, first-time buyers and renters can put down less through Fannie and Freddie. Until recently, in CA you could purchase a home with 5% down under 720 score.

This just made affordability drop in a big way. To compensate, house values have to fall even further. This will also shuffle folks over to FHA for loans over 80% where rates are higher and where much fewer programs are available, which I am sure is part of the master plan.

Ultimately, this will be great for housing in the future, as home owners will be nowhere near as leveraged in their home. But between now and the years it takes to get to ‘ultimately’, you must be aware of how damaging things like this can be to housing. -Best, Mr Mortgage

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31 Responses to “For Many, 20% Down Payment Is All That’s Left”

  1. Please excuse my ignorance here..
    1) With F/F’s new streamlined loan mod program.. do they make borrowers have PMI? (I heard one of the requirements of a mod is that the borrower is >90% LTV). If so, wouldnt that force all loan mod candidates to have FICOs > 720?
    2) FHA/VA loans – does this mean FHA type loans will likely become even more popular? What are the restrictions for those? How do they differ from a Well’s loan for example? All I know is FHA only requires 3% down..

  2. Lenders have been ratcheting up loan qualifications for almost two years now. IMO the worst part of the prior lending orgy was when they stopped verifying income. That was followed closely by eliminating the need for skin in the game. With both those things fixed now, new loans will be fairly reliable in terms of being repaid as agreed.

    That, and not lending people over a half million dollars to buy tract homes in east bejesus, california should fix the problems going forward…

  3. Seemed like all they wanted was a good FICO back in the salad days. Pretty sure that’s all in the past now. Too bad. I want to abuse my credit and it’s too late for me. 🙁

  4. They shouldn’t use FICO. Just downpayment, relationship of income to cost, proper appraisal. High FICOs didn’t help before, low FICOs probably won’t mean much going forward as far as the ability of owners to make mortgage payments. Low FICOs will just keep buyers out of the market for the next 7 years.

  5. The FHA programs were and still are the best bet for many borrowers for a purchase or refinance. The loan limits vary by county and state but the rates are only slightly higher than what the same borrower would pay on a conforming loan. Mr. Mortgage is right of course that there are other restrictions on FHA, including adders (fees) that the borrower must pay, depending on credit and loan to value and lower loan limits in some cases. The minimum down payment on FHA loans will also increase to 3.5% starting next year. However, the last time I looked, the default rate on FHA loans is quite high (over 10%), so I would expect the FHA to also tighten their underwriting criteria.

  6. Just out of curiosity, since homes are normally joint purchases between two people, do they BOTH have to have scores about 720? Is it averaged?

  7. Oh my god. Are the people at Well’s going insane. Next thing you know they will be requiring that your house not cost more than 3x your yearly income. Unbelievable.

  8. As I read these Implode Postings, it is looking more and more like effecting class warfare with bad risks being bailed out, president elect-stupid head trying to define rich and poor, good and bad via income, all which will lead to infighting between the masses while Congress skates and whistles past the graveyard(s).

  9. And what is wrong with “your house not cost more than 3x your yearly income” ?

  10. There is nothing wrong with 20% down, full docs, and good credit for most mortgages.

    Where a borrower can show that their current rent payment is greater than the PITI, 0% down is acceptable.

    Between these two measures others could qualify.

    With 30% down no docs should be required.

    That is the way it was 30 years ago and it worked. Nothing more needs to be done.

  11. Hope someone can answers all the questions being posed. This is all very complicated..

    Is it not mad that the FHA accepts 3.5% down on non-recourse , loans in a falling market.

  12. Mad? Paulson has been yammering away for the last half hour. The more he talks the more the market is going down. The whole government is mad with fear and ignorance but it acts anyway! No where to run. No where to hide. The elephant is in the china shop.

  13. Brant Gaede

    Yeah, I see Bloomberg is sueing the Fed under FOIA to disclose about the 2 TRILLION is assets that they are failiing to disclose the makeup on. Maybe that is why Paulson said that they won’t be buying bad paper but only stock in the banks, looks like the Fed is sticking those on their balance sheet. Looks like they are trying to hide the full size of the problem.

    Nov. 10 (Bloomberg) — The Federal Reserve is refusing to identify the recipients of almost $2 trillion of emergency loans from American taxpayers or the troubled assets the central bank is accepting as collateral.

  14. This will make the house I am buying even cheaper!

  15. This is for Hibryd,

    On conventional loans, the rule has always been that you use the lowest mid FICO score for both borrowers, so yes, they both would have to be above 720. Hope that helps

  16. BFD?
    I always said, if you can’t at least put down 20% for what you want to buy, you can’t afford it.

  17. Graham, if they made mortgages recourse NOBODY would buy a home. Well I suppose some morons could still be NRA’d into it, but 99% would be too smart… I hope anyway. Maybe 80% or so or try 50%? Well I can say with certainty I wouldn’t.

    It is kind of funny that why the idiots on the hill are telling the lenders to lend the cost to borrow is going through the roof. Prime loans at double digits with 20% down and other fees and cost involved. Not to mention a big fat Realtor check if you so choose.

    This will not work and Paulson is wrong as he has been all along. He is a lame duck Tresurer with a completely moronic Frank running the show beneath him. MG get these people out of power before we are all done as a country!!!

    Congress is no better and yet these folks keep getting elected time and time again and we keep paying higher and higher taxes… please stop. Somebody… anybody WAKE UP… please I am begging you all that read this.

  18. Stu,

    I appreciate your concern. Your plight to change or save our country.
    It’s not the end my friend. No matter where this goes, or how bad it gets, there is always a side that can benefit.

  19. od, I understand and agree that we will rise again as a nation at some point down the road no matter how much it gets screwed up or even despite the current incompetence at the top. It just pisses me off to know end to watch this occur, and not be able to do anything about it. I can’t rely on the voters, I can’t do it myself and no party is really that convincing it will bring actual change. Where to go from here? Got any ideas my friend?

  20. Any 1st lien lenders doing high CLTV mortgages?

    Any lenders doing 2nds to high LTVs?

  21. Oh the bankers will come around and they will deal. Just stick them out on the plank and dig that sword of non recourse mortgage into their ribs and watch them beg you not to feed their asset to the sharks of foreclosure! Not only will you be able to name your price and interest rate, your going to insist on free checking and a safety deposit box.

    If the banker is lucky and caught you in a good mood, you might be willing to let them value their asset above market, if they are willing to come down on the interest rate and make the loan assumable… The further out on the edge of the plank you get them the better the deal is going to get.

    Your holding all the cards, they are the ones trying to save their asset, your deposit and closing costs went up in smoke a long time ago.

    While the banker is mulling over the deal, you will be kind enough to house watch for them at no charge. So stop making payments, book that trip to Hawaii (from the money you save from not making your payment) and have a couple of weeks of rest and relaxation. Pretend if you will, that your planing for a future at AIG and want to get the feel of a resort so remember to book your spa time when you make your reservations.

    If the banker gives you any lip, just give that mortgage a good twist in the ribs and they are going to come around real quick. Just point out to the house down the street that they also hold a mortgage on and look him straight in the eye. Then you give it to him straight out and ask him: “What do you think is going to happen to the value of that asset when you hit the water??…” Then give him a final twist of the mortgage if there is a moment of hesitation.

    The question is, do you want to do it now, or wait for a better deal down the road when the market is in total chaos and prices are really depressed?

    If the banker even mentions fees or points, give him a good stiff backhand. When you go to the bank they charge you. When they come to your house, you charge them. Don’t hesitate to put them in their place.

  22. […] half of O.C. homes selling for a loss – OC RegsiterHome Inventories Decline but Remain Huge – WSJFor Many, 20% Down Payment Is All That’s Left – Mr. MortgageFannie, Freddie soon to drop high limit – SF GateHow to Buy a Foreclosed Home – […]

  23. I think housing prices are going to go lower than we EVER imagined…They literally might be giving them away before it is all over.

    Im serious.

  24. Well said Bert and the sooner the massses realize this the sooner we can get this shell game moving again, but in the right direction this time around!!!

  25. Stu,

    How long do you think it is going to be before the banks are all wound up in a giant class action lawsuit? Not only for damages to home holders but for people who were otherwise damaged by stupid lending practices? I don’t think that it helps either that they own stock in their own regulator, the Federal Reserve. I wonder if Meridith Whitney is figuring this into any pricing forecasts?

    Also, how long is it going to be before the state passes a law that if you were given a predatory or other unsound mortgage product or even if the bank failed to properly qualify a loan that any resultant foreclosure black mark on the borrowers credit file be expunged? Even if you walked away just because you were underwater and for no other reason, It was the banks that crashed your value due to their unsound practices. I think people who are worried about a foreclosure black mark are going to find that a state or federal law will be passed to protect consumers from the unsound practices of the banks and any resultant black marks on credit files. I am sure the California legislature will be all over it at some future point.

  26. Mr. Mortgage,

    Continue to read daily and I thank you for your AAA rated analysis.

    The questions I have right now are:

    1. Considering .gov’s willingness to change the rules, how much farther and for how long will prices fall?

    2. With reserve requirements low or zero?, will any “whopper” banks getting “TARP Pie” die? If so, who?


  27. “Graham, if they made mortgages recourse NOBODY would buy a home. Well I suppose some morons could still be NRA’d into it, but 99% would be too smart… I hope anyway. Maybe 80% or so or try 50%? Well I can say with certainty I wouldn’t.” Stu

    In Canada, mortgages are recourse, and shockingly enough, we do not have massive foreclosures collasping home values. It is far far to easy for people to just walk away in America, and you can be pretty sure if banks keep getting what they ask for, then non recourse loans will be gone.

    The biggest problem I see is there are no ties that bind a home owner to the mortgage lender. When you are tied at the hip, the home owner is more responsible in choosing a mortgage he can afford, and the bank is more responsible in lending an amount they know can be paid back. None of this happened in bubble states.

    If the situation continues to get worse, its not that hard to pass an executive order making all existing mortgages recourse, and any further defaults, the remaining balance would be garnished off your wages. I think its pretty evident that goverment is not looking out for the home owners best interests, and will cater first and foremost to the banks.

  28. CanadianJack

    That is exactly what I see happening is the government making all loans retroactively recourse or at least attempting to do so. They will likely run that up a flagpole to attempt to get public reaction first but indeed, executive order would seem likely. The other problems I see is that it is up to the bank to foreclose. If you stopped making payments, the banks can drag until an executive order is passed preventing you from walking.

    Hey does anyone know that the Federal Reserve being a private corporation, if they can be sued for economic malpractice?

  29. Jack, I have one huge 3-letter word for you.. “YET”

    I have spent some time in Canada of late and did some research because of my experience. I will say this from my limited but recent outlook for Canada. Housing CRASH! Specifically a huge condo crash.

    Toronto and Vancouver are two of Canada’s emerging markets and they are going to get crushed. The holes in the damn are already starting to show and it is clearly obvious their are no fingers to plug them.

    Now all of these lenders will be chomping at the bit to attach your checks through court orders like a credit card can do today. The difference is CC debt may be 10K, 20K or even 40K, but we are talking 400K here. What does someone do that gets foreclosed on and at auction it sells for 200K. Now they owe 200K and have no place to live. I would never enter into an agreement where that could happen… ever!! Now if you have 100K to put down on a 200K home that’s ok. How many have that? My point is recourse loans will not work in America right now because nobody has any money and the RE market is so volatile. That needs to be implemented when times are good not bad…

    You have no control over industries or homes so why would you make that kind of gamble? You might as well bet in Vegas and hope for a big hit. I like to bet on things that have an outcome I can deal with and I steer away from bets where I can get wiped out overnight (see Toronto condo owners). I let others play in that rhelm… hey call me conservative.

  30. […] you had put 20% down and now find that you owe more on your property than it is worth in the open market, I am sorry to […]

  31. Robert Meagher –

    Thanks! The fear that I might be the liability in our upcoming home hunt was the final straw I needed to get my official FICO score. (And it was insanely good! Woot!)

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