Nothing Down Mortgages are Back

I really thought it would take longer than this.

Mcmansion_under_construction W. Marsh If you have been reading this blog for a while you know that I am generally skeptical of the proposition that we will learn much of anything from the Great Recession. My assumption has long been that given five or ten years we will be the same bunch of ignorant fools we always were, doing the same foolish things.

But I did think that in the shorter term, this year and next, some of the more obviously foolish stuff would be avoided. I didn’t think anybody would be willing to invest in GM in 2010. And I didn’t think that anybody would be discussing taking out new no-money-down mortgages any time soon. I was wrong on both counts.

This past Friday, Bankrate.com ran, and outlets such as Yahoo and CNBC carried, a helpful article: 4 Mortgages that Require Little Money Down. It was a roundup of several, mostly government sponsored, programs that will loan a person virtually or actually all the money they need to buy a house. Truly a trip down memory lane.

An optimist might have thought that with the government’s fiscal problems and the debacle of Fannie and Freddie still an unresolved open sore, the Feds might be a little gun-shy about writing and/or guaranteeing mortgages of any kind just now, never mind the more dangerous types.

Alas, no. The VA is still happily helping veterans borrow up to their eyeballs. Because those who have served our country in harm’s way deserve to get loans the private sector worries they can’t pay back.

The Department of Agriculture has a popular program to guarantee mortgages in rural areas. Their definition of rural is accommodatingly expansive. From looking at Eastern Massachusetts on their helpful map I infer that anyplace you need a car to get to the store counts.

The FHA, which during the good old days of the housing boom insured 3% of mortgages, has quietly become a market leader. They now cover 30% of borrowers. Of course, they are not so crazy as to finance the entire purchase. They require a 3.5% down payment. That’s up from 3% two years ago.

And Bankrate did not even list all the high-leverage options. From the Boston Globe’s Boston Real Estate Now blog we heard last week about a new program from de facto federal agency Fannie Mae called Affordable Advantage.

The new initiative lets qualified, lower-income buyers with good credit get a mortgage without even having to meet the already low, 3.5 percent down required on most federally-backed mortgage loans.

Instead, these lucky few are eligible for 100-percent loan to value mortgages. In some cases a token down payment, such as $1,000, is required.

And it is not just the government that has rediscovered the joys of inadequate capitalization. Remember private mortgage insurance, known to its friends as PMI? After a too-short hiatus, it’s back. From Bankrate:

PMI has become easier to get. From the start of the housing bust until just recently, mortgage insurers slapped a "declining market" label on the worst-hit housing markets and required minimum down payments of 10 percent or more, instead of the traditional minimum of 5 percent.

We have now returned to the traditional state of things, wherein homebuyers anywhere in the country can pay an immodest fee and put only 5% down on a house.

I am hoping that the housing bust is recent enough that I do not need to go into great detail about how bad an idea this is. A no- or low-money-down mortgage is dangerous for the borrower, the lender, and, if enough of these loans are made, for the economy as a whole. And don’t get me started on our tax dollars being wasted.

Again, I am surprised only at the timing, not at the fact that 95%+ financing is back. We are a naturally optimistic people with a very selective memory. But you might think that less than two years after the mortgage apocalypse a how-to on buying with very little down might mention, at least in passing, some recent problems with the practice. Granted, Bankrate.com is in the business of selling ads to lenders, so it is naturally biased in favor of borrowing money. Still, there is not a single word of caution in the piece. (The tone of the Globe’s post, on the other hand, is appropriately alarmed.)

I now predict that we are only months, maybe weeks, from seeing cheerful items in the mainstream media about how you can live the American dream of home ownership with little or no down payment. Which means that we are only eight to ten years from seeing articles about how bad an idea it was.

[Photo – W. Marsh]

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