Are low down payments back?

Mortgage credit has remained tight since the housing crisis. The response was intended to ensure sound, well underwritten mortgages were provided to buyers, but an unintended consequence was that many buyers were locked out of home financing. Recently, Fannie and Freddie regulator FHFA said that they would take steps to expand credit for the purchase market, including backing loans with down payments of 3%, down from today’s 5%. And, federal agencies approved the final QRM, or qualified residential mortgage, rule that removes a once proposed requirement of a 20% down payment. Finally, individual mortgage lenders began announcing earlier this year that they were easing their loan requirements. (For a thoughtful commentary on the complexities of all these changes and what they mean to buyers, read this post in the WSJ Banking blog.)

 

As we await more details on the FHFA plan, the recent mortgage news has given fire to the old myth that low down payments are what caused the housing crisis.

Borrower beware?

The housing crisis was caused by mortgages with short term arms, no-documentation and other exotic features often not understood by the buyer. No doc loans, liar loans and loans with poor underwriting standards were the cause of the toxic mess. Do you ever hear anyone calling for an end to 100% VA financing? In fact, low and no down payment loans through the VA or housing finance agencies (HFAs) performed better than the conventional market. Why? Studies show that the best indicator of loan performance is actually homeownership counseling. (Here are more facts to challenge the next person who says “low down payments caused the foreclosure crisis.”)

Consider these comments from David Stevens, president of the MBA:

Down payments are the single biggest barrier to homeownership but it is not, by itself, an indicator of ability to repay a mortgage. The move to bring back the 97% LTV will come with higher premiums for mortgage insurance, more scrutinized underwriting requirements, and will only raise the maximum LTV by 2% for the GSEs from 95% to 97%. Any allusion that this is returning to the kinds of antics that led to the housing bubble is simply ridiculous. QM eliminates no-doc, neg am, balloon, extended term, shorter term arms, IOs, and more. Every loan must meet the ability to repay standard. Just because the Director and the team at FHFA, as well as the MBA, realize that many Americans do not have the luxury of wealthy parents to provide a gift, or excess income beyond the fixed expenses of rental costs (which are rising), consumer debt, child care, and more to save up for a down payment as easily as others, does not mean they should miss out on what could be the lowest interest rates we will experience in our lifetime. The future buyers will be younger and heavily dominated by minority applicants in this country. Responsibly letting qualified buyers take advantage of this market by expanding LTVs by 2% is exactly the right thing to do and will help these homebuyers but will also help the economy. Each new home built adds 3 jobs in this country and over $100k in economic stimulus, per the NAHB.

Important alternatives

Homebuyers and real estate professionals should know there are other alternatives in this market that provide even more flexibility and benefits to buyers who need it. The Consumer Financial Protection Bureau (CFPB) provided an exemption to QM and QRM for HFA program loans because of the key role HFAs play as responsible providers of affordable mortgage credit to low- and moderate-income and other underserved borrowers. Homebuyers can find some of the safest and most affordable loan through HFAs.