Monday, December 06, 2010

Government Website Promotes "3% or Less" Down

Here's a brochure titled "How to Buy a Home With a Low Down Payment: A Consumer’s Guide to Owning a Home with Less Than Three Percent Down," which was developed by the Mortgage Insurance Companies of America in cooperation with the Extension Service of the U.S. Department of Agriculture, and appears on this government (GSA) website.

“Many people mistakenly believe that you have to come up with a down payment equal to 20 percent of the price of a home. In fact, home loans with down payments of less than 20 percent are becoming increasingly popular. They are called “low down payment mortgages." This is good news for the millions of home buyers who are finding it difficult to save a large down payment, especially for their first house. More and more borrowers are taking advantage of low down payment mortgages and becoming homeowners with less than three percent down."  

Q: Isn't that exactly the kind of mortgage lending that helped cause the housing bubble? 

HT: Joy Pavelski

43 Comments:

At 12/06/2010 9:29 AM, Blogger Prospective Economist said...

Just subscribed, great blog.
I aiming Economics towards the younger generations.
Thanks.

 
At 12/06/2010 10:29 AM, Blogger juandos said...

Hmmm, just more of the C.R.A.ven Cover-Up in action...

 
At 12/06/2010 10:46 AM, Blogger Patrick said...

3.5% FHA loans are the most common loan used for purchases in our market under $250,000 and you can get these loans up to $417,000! The USDA offers 0% down loans and they aren't just for farms, but any area deemed "rural" enough for them.

 
At 12/06/2010 11:26 AM, Blogger Jason said...

Hi Mark -

You teach at the University of Michigan. Do you think those MBAs are cheap? How 'bout them JDs, MDs, and DMDs? Nope.

Although I'll bet it's easy up there on your perch looking your nose down at those of us with literally hundreds of thousands in student loans, all the while happily collecting those hundreds of thousands in tuition.

 
At 12/06/2010 11:28 AM, Blogger Buddy R Pacifico said...

I would like to buy more multi-family buildings (apartments) but it does require a down payment of more then 3%. Any guesses on what my lender said the percentage is, at this time, for any borrower?

10, 20 or 30%? Answer: 30% Down Payment!

Government guarantees probably account for most of this absurd difference in down payment %.

 
At 12/06/2010 11:49 AM, Blogger Hydra said...

The USDA offers 0% down loans and they aren't just for farms, but any area deemed "rural" enough for them.

USDA also offers some spectacular loan packages to business in rural areas.

 
At 12/06/2010 11:51 AM, Blogger Hydra said...

There are some multifamily apartment buildings in rural areas, but hard to market. Sure you could get a good deal from USDA, just not in midtown Akron or wherever.

 
At 12/06/2010 11:53 AM, Blogger Hydra said...

"those of us with literally hundreds of thousands in student loans,"

============================

Jeez. I graduated wth no debt and money in the bank. Then again, it took me eight years.

There are choices.

 
At 12/06/2010 11:54 AM, OpenID Tom said...

I would agree that it is a good when borrowers have a larger down payment. However, it is unrealistic to expect that most borrowers could accumulate a 20 percent down payment in a few years. I think the larger problem with housing was the lack of documented income and credit history and those mortgage originators and appraisers who were complicit.

 
At 12/06/2010 12:21 PM, Blogger morganovich said...

jason-

education is an investment like many others.

if you spent hundreds of thousands on your investment, it had best have some pretty good payback. a $300k education to be a golf caddy would not make a ton of sense.

i have no idea what you are trying to argue about zero down loans. your argument appears completely orthogonal.

are you trying to argue that because you are already deep in debt we should give you more debt at cheap rates?

under what system of underwriting does that work?

 
At 12/06/2010 12:26 PM, Blogger morganovich said...

tom-

the size of a down payment should not be mandated in any way. it should be a part of the negotiation between borrower and seller just as interest rate and the term of the loan are.

if both sides find the transaction mutually beneficial, great.

no doc loans were largely a symptom of a special kind of government interference around the CRA and freddy and fannie. the CRA forced loans to be made to those who were no creditworthy. banks like citibank that tried to resist this were sued into compliance.

then, saddled with loans they did not want, they packaged them and sold them to freddy and fannie for securitization. F+F used the implied government guarantee they had been given to turn sub prime into AAA by slapping their stamp on it.

that was the key issue that made the whole system run. absent that, lenders would never have made the kinds of loans that they did as they would have known that they were keeping them.

 
At 12/06/2010 1:47 PM, Blogger Hydra said...

no doc loans were largely a symptom of a special kind of government interference around the CRA and freddy and fannie.

==================================

I had a no doc, low doc loan, and it wasn't mandated. The bank did a cursory inspection aof my payment history and said, shoot, where the risk?

Not every loan that isn't fully vetted is a risk.


Whata re we looking for, government nterference in one direction, and not the other?

 
At 12/06/2010 1:48 PM, Blogger Hydra said...

Next time I got a loan, they ran me through the wringer. The loan was no safer or better secured.

 
At 12/06/2010 2:11 PM, Blogger morganovich said...

hydra-

"not every loan that was not vetted was a risk"

i think this is the wrong argument. not every stock you pick by throwing darts will go down either, but that does not make it a good way to build a portfolio.

also, the reason your lender was willing to lend to you without vetting was almost certainly that they could just sell the loan on.

if they are not going to be the ones holding the bag, why doing the work?

just pitch it to F+F and go lend the same money again.

 
At 12/06/2010 2:14 PM, Blogger morganovich said...

h-

"Next time I got a loan, they ran me through the wringer. The loan was no safer or better secured."

yes, it absolutely was safer and better secured. the bank had no idea how safe it was the first time.

driving straight down the same tunnel IS more dangerous if you close your eyes.

sure, you're still the same guy with the same ability to pay, but the second time, the bank knew what kind of guy you were. the first time was a guess. that is not "just as safe" from the bank's standpoint.

 
At 12/06/2010 5:44 PM, Blogger Dr. T said...

The federal government has completely screwed up mortgages. Under the new rules, buyers with no collateral, no savings, and a salary barely high enough to cover the mortgage payments during the early years of an ARM are encouraged to buy a house.

However, I now cannot get a mortgage for $300,000 despite completely owning a home worth $600,000 (that I'm selling) and having liquid investments worth over one million dollars. I am not qualified for a mortgage because I'm retired and my investments don't generate a guaranteed income. The fact that I have collateral worth more than five times the mortgage amount made no difference.

The mortgage broker I spoke with told me he had another retired client with a net worth of six million dollars who could not qualify for a half million dollar mortgage. Meanwhile, he's providing $400,000 mortgages with less than 5% down to families that net only $60,000 a year.

 
At 12/06/2010 7:38 PM, Blogger Benjamin said...

"The USDA offers 0% down loans and they aren't just for farms, but any area deemed "rural" enough for them."

The above, from Patrick, shows that the true coprolite in our federal budget is in the rural Red States. Unfortunately, every state gets two Senators.

That is why Red States often get back $1.50 in federal lard for every $1 they send to Washingont, DC.

Kentucky gets back $1.50 for every dollar they send to DC.

Mitch McConnell, Senator Minority leader, is from Kentucky, as is Ryan Paul, junior Senator and the new darling of the Tea Party crowd.

Oh sure, I think those two will suddenly cut the federal budget, including the flows of taxpayer money that keep their state fat and happy in subsidy land.

The Red State Socialist Empire--Don't Tread on Us, or Cut Our Lard"

 
At 12/06/2010 11:06 PM, Blogger Hydra said...

Nice theory Morganovich.

Except the low doc loan was the first one for that lender. My usual bank with which I have made several loans would have done the deal but at a higher rate, so I left them for another company. Later I got a better rate and refinanced again, different lender but the application was a pia . Not long after that, my original bank bought the loan! They could have kept me as a customer for a lot less.

Overall, bankers are about as dumb as they come.

 
At 12/06/2010 11:12 PM, Blogger Hydra said...

T: you had a lot of assets. Were they actually pledged as collateral?

 
At 12/07/2010 12:32 AM, Blogger Dr. T said...

Hydra: It didn't matter. The new mortgage rules require a steady income to pay off the mortgage. Collateral did not matter (though it would have if I had applied for a personal loan or a business loan).

 
At 12/07/2010 11:58 AM, Blogger VangelV said...

This is exactly what got Americans into so much trouble and exactly why the claims of a real and sustainable recovery are premature.

 
At 12/07/2010 1:31 PM, Blogger Hydra said...

Right, so it was a mortgage loan. but you need collateral AND the ability to repay. Additional ollateral on a real estate loan would not matter unless you are in a recourse state, it only shows that you have net worth.

You could have converted it to a personal loan with Cash or Cash equivalent for collateral. Still those rules are not government rules, they are bank rules, and they can be negotiated.


I have taken out loans where I put up cash or cash equivalents as the collateral. Then the interest rate can be as low as a half percent, or the difference between what the bank pays and what it charges.

This sounds crazy, but after taxes it was cheaper to borrow the money against cash than it was to pay cash. It was only a few dollars, but the real benefit was the discipline it imposed. Had I just paid cash, the reality is that other things would have happened and I might not have ever "paid myself back". When my wife saw what happened, she wanted to borrow some more money.

Only problem was one time I had a problem getting my collateral BACK from the bank when the loan was paid off. They were holding a CD that matured the same time the laon was paid off, and were giving me a runaround (not at this branch, etc. etc.).


Now you are not borrowing against the property, so its not a mortgage, and mortgage rules don't apply. You are borrowing against cash, which you already have, and using the proceeds to buy the property outright.

If the end result is the same, and the cost is only a little more what do you care? You are going to sell your other house anyway. The bank only wants risk free business. Must be nice.



What you pledge for collateral does make a difference, but your example does show that bankers are dumb as toast.

When I was young I was trying to establish myself in a new city. Applied for a small loan and was turned down because I had not leived there long enough. Then got turned down because I had not worked there long enough. Third time I got turned down over some other excuse. I asked to borrow the loan officers phone and placed a call to my home bank, and got the loan approval over the phone.

Then I told the loan officer she needed to get the stick out and stop acting as if she was doing ME a favor.

Never had a problem with her after that.

 
At 12/07/2010 1:38 PM, Blogger Paul said...

Benji,

"The above, from Patrick, shows that the true coprolite in our federal budget is in the rural Red States. "

Your boyfriend and the Democrats in Congress could have shown us how it is done. Instead, they grew federal spending by around a trillion per annum. Your boyfriend has even cooked up new schemes for rural America like his idiotic broadband expansion program.

"..as is Ryan Paul, junior Senator and the new darling of the Tea Party crowd."

His name is RAND Paul, you are mixing him up with Paul Ryan. Your expertise in this area is about on par with your opinions on Colombia, a country you don't even know how to spell correctly.

 
At 12/07/2010 1:56 PM, Blogger Hydra said...

The real screw up in this whole thing is the idea that somehow 3% down makes the home more affordable.

If the feds really want to make homes more affordable they could strike down some of the hyper-protectionist zoning restrictions and make it easier to get a building permit, provided that what you build is safe.

 
At 12/07/2010 2:43 PM, Blogger Ron H. said...

"If the feds really want to make homes more affordable they could strike down some of the hyper-protectionist zoning restrictions and make it easier to get a building permit, provided that what you build is safe."

Except that the feds aren't involved in building permits and zoning restrictions.

 
At 12/07/2010 2:45 PM, Blogger Ron H. said...

"His name is RAND Paul, you are mixing him up with Paul Ryan. Your expertise in this area is about on par with your opinions on Colombia, a country you don't even know how to spell correctly."

Oooooops!! Which foot was that, and how does it taste, benji.

 
At 12/08/2010 1:21 PM, Blogger Benjamin said...

I know how to spell Cocainelombia (recently a topic of a Wall Street Journal Op-Ed that said coke is bigger than ever there).

Yes, I forgot it was Rand Paul, not Ryan Paul.

But Facts is Facts: These Red State Bozos want federal lard by the truckloads.

Oh, remember how the Red State Socialists cut the federal deficit from 2001-2006? In a growing economy too.

 
At 12/08/2010 3:58 PM, Blogger VangelV said...


But Facts is Facts: These Red State Bozos want federal lard by the truckloads.

Oh, remember how the Red State Socialists cut the federal deficit from 2001-2006? In a growing economy too.


The Red State Republicans and Blue Dog Democrats were just as eager for pork as the Blue State socialists. That is why voters need to reject both. But they won't because voters still foolishly believe in a free lunch and do not think about the long term effects of their stupidity.

 
At 12/09/2010 2:40 PM, Blogger Hydra said...

Except that the feds aren't involved in building permits and zoning restrictions.

==================================

The Supreme court has studiously stayed out of zoning issues for the most part. However the original ruling stated that it was legal partly because it allowed for long term planning and protection of property rights.

Local officials soon turned that on its head, with the argument that they are free to change (your) zoning at any time.


The Supreme court has demanded compensation where egregious regulatory takings occurred, but only when the taking is above 95% of the value. Local officials seized on that as a way to taske 94% of the value.


The Supreme court has also supported the doctrine of property as a bundle of sticks. I argue that if the county takes one of my sticks, haven;t they taken 100% of that stick, thereby requiring compensation?


But the worst of the lot is that The supreme court has upheld the doctrine of full administrative recourse, meaning that you must exhaust EVERY administrative remedy before you can get standing to sue. Local officials have responded by resorting to government by delay. They offer dozens of administrative recourses, each one more expensive than the last to pursue. In some places the requirements just to fill out an application for a zoning request will cost north of $100k, whether yur request is simple or complex, the requirements are the same. Consequently, in zoning there is almost no application of due process.

The federal government is involved in local building issues by not enforcing on local governments both the spirit and the letter of the orders it has written.

 
At 12/09/2010 9:46 PM, Blogger Ron H. said...

Hydra, based on your negative experiences with government and regulations, I can't understand why you consistently call for more regulation on almost every issue. It just doesn't make sense.

 
At 12/10/2010 1:10 PM, Blogger Hydra said...

I argue that we need more regulations protecting more kinds of property, not just regulations protecting the property of the big guys.

My county supervisor told me to may face "My plan for your property", he said "Is to have som rich person buy it, so they can afford to put it in conservation easement and nothing will ever be built there."

Zoning in my county consists of a deliberate plan to exclude ordinary people so that rich people can buy large tracts at a huge discount to its real value.

Obviously, IF THERE WERE NO REGULATIONS, I could build as I please and sell to whom I please. I'm not arguing that point.

But that isn't the case, and never will be. Besides which it isn't clear that I would be any better off if it was the case.

Because everyone else would have equally ultimate rights to screw things up all they like. We have regulations because the market does not work in the real world the way theory says it should.

We have bad regulations because in writing them we forget the one thing the market theory teaches us: the right to take something comes with the responsibility to pay for it. Every right carries with it an equal and opposing responsibility.

Call it the golden rule or live and let live, but the argument for no regulation amounts to claiming infinite rights and no responsibility for everyone, and obviously that cannot work.

It is not a question of whther we will have regulations. It is a question of whther we will have fair regulations. In order to approach fairlness, we will need a lot more of them. How do we decide what is fair? We establish a market that prices regulation.

See the article above on Speed Camera Lotteries.

 
At 12/10/2010 1:34 PM, Blogger Hydra said...

My point is that the feds are involved in zoning regulations, since the Supreme court issued its findings in Euclid.

The court held, basically, that the zoning rules were a reasonable extension of police powers that would make things safer and better for everyone, allow for more security and long term planning.

That would have been OK, if zoning boards had heeded the courts findings as caveats for fair play. Instead, zoning boards viewed them as outer limits. As long as they did not cross those boundaries thay were free to expand their own rights and power, or the rights and powers of certain constituents, at the expense of others.

I don't believe that is what the supreme court had in mind, at all. What we now have is a perversion. Just as what caused zoning regs in the first place was (an opposite) perversion.


The court has clearly said that regulatory takings can exist. They have said that a regulatory taking clearly exists when 95% of the value of property is taken. They never said that a regulatory taking does not occur if the amount is less than that, but this is how the ruling is interpreted by local officials, who have gleefully used it to grab all of the power and rights they can get, without accepting the equal and opposite responsibility, that comes with them.

In the market, we have basically one rule "If you want something, you have to buy it" If you take it without buying it, then government comes down on you.

All I'm saying is that rights are something, permissions are something, valuable property just like anything else. If one group takes those rights without paying for them, it is the business of government to come down on such people, as they would any other thieves.

 
At 12/10/2010 10:45 PM, Blogger VangelV said...

I argue that we need more regulations protecting more kinds of property, not just regulations protecting the property of the big guys.

Why not just argue for property rights? Period. End of story.

Regulations reduce rights because they interfere with the way that people can use their own property and weaken the ability of individuals to use the courts to protect themselves from the actions of others. Under common law I could use the courts to stop someone building a stable next to my home because the smell would lower the value of the home and would be a nuisance to me. But if someone bought off the city council to change the zoning I would have no recourse.

Obviously, IF THERE WERE NO REGULATIONS, I could build as I please and sell to whom I please. I'm not arguing that point.

But you could not. There are laws to protect others from your use of the land in such a way that your use would do them harm.

 
At 12/10/2010 10:46 PM, Blogger VangelV said...

We have bad regulations because in writing them we forget the one thing the market theory teaches us: the right to take something comes with the responsibility to pay for it. Every right carries with it an equal and opposing responsibility.

You have no right to take anything from anyone.

 
At 12/10/2010 11:18 PM, Blogger Hydra said...

I do not, and you do not, but the government does, provided it pays. Individuals and groups have usurped that power for private benefit.

 
At 12/10/2010 11:38 PM, Blogger Hydra said...

Lets assume we both have infinite property rights. All of your rights stop at my property line and vice versa. I can build my house right on the line, and so can you. This benefits neither of us. So we each agree to stay ten feet back, for fire safety. Neither of us has taken anything. We made a deal with mutual restrictions and mutual benefits. Over time this agreement becomes generalized and ultimately codified as a regulation that helps everyone and hurts no one.

But, now due to topography we realize there are a few irregular lots, that have not been built on. We agree to enlarge the regulation from ten ft to 30 ft, knowing this will make those lots unbuildable.

We have now used government to provide (us) a public benefit: less crowded schools and streets, and more open space.

We could have got the same effect by buying the vacant lots, but that costs money.

The new reg applies to everyone, so if our house Burns down we would need a 30 ft setback to rebuild. Yet the revised rule is less fair than the original because the costs and benefits are no longer reciprocal.

Not all regulations are bad, but some amount to stealing.

 
At 12/10/2010 11:54 PM, Blogger Hydra said...

There are laws that prevent you from using your land in such a way that would do them harm.

====<<<<<<<<==========<<

You don't see the assymetricity in that? Such laws are fine as long as they are equal and opposite in effect.

The very premise of your statement is that they can pass any law that prevents me from harming them. Even if the law harms me or leaves me without rights they have already used.

Like the setback rule. Or the rule that increases minimum lot size, or required proffers, after they have built on smaller lots.

Under your argument, all I have to do is claim that some new unheard of harm will be done, and I can pass any law without retroactive effect on myself.

The key here is that IF there were no regulations then I could build as I please. You and I both pointed out that this is not the case. We do have rules. Many of them are bad, so we need more rules.

We seem to agree.

 
At 12/11/2010 12:13 AM, Blogger Hydra said...

Why not argue for all property rights?

That is what I'm doing. We don't have enough rules protecting enough kinds of property. As you point out, if your horsey neighbors buy off the zoning board..........

They have created a new kind of property, out of thin air, that they bought and paid for. There are already rules against this, but they are not equally enforced, so they lose the ethical requirement of equal rights and responeibilities AND it violates the rule that says property taken for public use must be paid for.

The zoning board has decided the public will be better off if they allow the horse barn, or worse.

But you,as the closest neighbor are not. The zoning board has taken from you in order to create a public benefit.

Which would you rather have? The right to Sue for damages and maybe collect, or more regulations that say you must be paid? If the zoning board knew they would have to pay you, wouldn't they be more cautious about accurately calculating the public benefit?

I think we need more rules and better efircements of the ones we have.

Your easy suggestion of postulated bribery suggests why.

 
At 12/11/2010 12:31 AM, Blogger Hydra said...

Under common law you could TRY to collect damages. Under hydras law you would be guaranteed damages. And you and your horsey neighbors would both know how they would be calculated. This would affect how much you would be willing to pay for your property. You would equally have the right to build a stable. But since they have one, your damage to them would be near zero. They would have paid you for the (local) right to have horses, instead of paying the zoning board.

(All of my neighbors have horses. I don't consider it a hardship. It would be a hardship when they complain that my horse barn is too close to their property line.

Especially since my horse barn was there before the property line was.)

 
At 12/11/2010 7:43 AM, Blogger VangelV said...

I do not, and you do not, but the government does, provided it pays. Individuals and groups have usurped that power for private benefit.

But the government does not have a moral right to force people to leave their properties. It can only do so because it has the guns to do so and the courts which permit it to initiate force against individuals.

Having that power is lucrative so the government puts it up for sale and those that can pay get to abuse others. This is why we need to cut the size of government by at least 90% and neuter it by taking away the power to initiate violence.

 
At 12/11/2010 8:34 AM, Blogger VangelV said...

That is what I'm doing. We don't have enough rules protecting enough kinds of property. As you point out, if your horsey neighbors buy off the zoning board..........

No we do not. The rules do not protect our property rights because we already have property rights that have been established by Common Law decisions. The rules circumvent those rulings and make it possible for the government to take away property from individuals.

 
At 12/11/2010 8:36 AM, Blogger VangelV said...

Under common law you could TRY to collect damages. Under hydras law you would be guaranteed damages. And you and your horsey neighbors would both know how they would be calculated. This would affect how much you would be willing to pay for your property. You would equally have the right to build a stable. But since they have one, your damage to them would be near zero. They would have paid you for the (local) right to have horses, instead of paying the zoning board.

Why is it that so many of the people on this thread are commenting without knowing what they are talking about. As I said, Common Law protected individuals and the current statutory laws have removed that protection. All we need is the recognition of the property rights that we have.

 
At 12/11/2010 8:37 AM, Blogger VangelV said...

(All of my neighbors have horses. I don't consider it a hardship. It would be a hardship when they complain that my horse barn is too close to their property line.

Especially since my horse barn was there before the property line was.)


Under common law the courts would not support you if you complained. But if you lived in a nice subdivision and had someone put up a stable next to you they would.

 

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