Nothing Down Mortgages are Back

I really thought it would take longer than this.

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]

Housing | Frank Curmudgeon | August 16, 2010 11:59 am

228 Comments

By Stagflationary Mark, August 16, 2010 @ 12:34 pm

For what it is worth, Monex just ran a gold commercial on CNBC. They want us to call and ask how we can buy gold with as little as 25% down.
By Stagflationary Mark, August 16, 2010 @ 12:40 pm

I should probably mention that I owned gold from 2004 to 2006. I have no interest in it at these prices though. I’m not a believer in “good at any price” theories.

http://illusionofprosperity.blogspot.com/2010/05/gold-to-aluminum-price-ratio.html
By Stephen, August 16, 2010 @ 2:14 pm

VA 0 down financing never went away. I managed to get a VA loan approved with a 603 mid FICO score a year ago, in the middle of the crisis. Granted, it took me a while to find a lender to do it, but I was able to prove the ability to pay.
By Frank, August 16, 2010 @ 5:00 pm

If you look at the numbers, home prices could still fall 20 or 30%. I’m surprised by how many new home buyers view that as totally impossible. You’d think after a huge real estate crash people would be leary – but, nope….
By Lance, August 16, 2010 @ 5:17 pm

Frank, I think you’re neglecting the fact that land is the only thing they’re not making more of, and the population is still growing. How can it *possibly* go down?
By Scott Simmons, August 16, 2010 @ 10:26 pm

I hadn’t thought about it that way, Lance! I’m going to run out right now and buy way more real estate than I can afford!
By Craig, August 17, 2010 @ 11:29 am

I haven’t put a lot of thought into GM as an investment vehicle, but I think you would have to admit it’s more attractive now than it was two years ago. Whether that makes it attractive _enough_…I suppose it’s a question of price. (And at prices like these, you won’t see any more Chevy Volts in here, either!)
By Kosmo @ The Soap Boxers, August 17, 2010 @ 1:00 pm

“For what it is worth, Monex just ran a gold commercial on CNBC. They want us to call and ask how we can buy gold with as little as 25% down.”

I want to buy my gold with 0% down. Or perhaps a token down payment of $1000.
By kitty, August 18, 2010 @ 1:33 pm

I am wondering if all these crazy mortgages would come back. wouldn’t it mean the real estate price may turn. It’s a practical question for me – my mother has recently died, I am taking my father to live with me, but the question is – to sell or to rent out his co-op (owned outright, can easily afford monthly costs even if place is empty, can get considerably more in rent than costs). The catch is that the co-op board only allows renting out for 2 years. So the million (ok in this case maybe 140K) dollar question is where the real estate in Westchester, NY be in 2 years. I am personally pessimistic, so I am inclined to sell, but after I read about these crazy mortgages I started to wonder if more people will buy and we’ll get another bubble….
By Mortgage Nerd, June 17, 2011 @ 11:32 pm

USDA and VA loans never went away and have always been full documentation loans. What I don’t see coming back for some time are the 100% Conventional loans that don’t require any documentation. It would be a good thing if those never come back.
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