The New Sub Prime Lender

I wonder who gets these good deals.  I would not be surprised to find out if they were government employees, politicians or well connected people.  We have big scandals in some of our local towns about who has been getting the "first time buyer funds."

I feel, as a mortgage banker, that "having skin in the game" has very little to nothing to do with defaults and foreclosures. Case-in-point is VA loans which are 100% financing and FICO scores allowed down to 580 (previously FICO wasn't even looked at). VA's default and foreclosure rates are less than half of FHA (which requires 3.5% down) and Conforming Conventional loans (which require a minimum 5% down).  Why is there a difference? Here's my opinion:

FHA and Conventional loans qualify a borrower based in debt-to-income ratios, usually a max of 45% for all debt including the proposed mortgage payment, but with "compensating factors" up to 55% DTI. And this is based on the borrowers GROSS INCOME.  I had a borrower recently who qualified for an loan based on this, but their net income after income taxes, health insurance premiums and other withholdings was 54% of their gross income.

The problem is that conventional thinking in qualifying someone for a loan doesn't leave any leeway for "life events" such as one person in the household becoming unemployed or temporarily not working do to medical or other reasons. It also doesn't take into account needs like utilities, groceries, auto insurance and auto maintenance.

VA initially looks at DTI, but ultimately qualifies the borrower on residual income after the mortgage and all consumer debt and utilities (yes, VA estimates utility bills into the equation) are paid.  VA's idea of how much residual income is needed goes-up with family size. Because of this VA borrowers qualify for less home, but they are in a better financial position from the start.

Oh, and USDA has almost as low a default rate as VA.

Vonce- Just like everything else. When it comes to the government they have different rules than everyone else. Fannie Freddie started the crash and FHA and USDA will keep it going. Thank you Barney Frank and fellow reps and senators that buy into the "homeownership is a right" crap. Just like some people are employees and some employers, there are those that are not cut out to own a home. They don't have the discipline (shown by no savings when the get the home loan) to save money for a rainy day to even pay for the upkeep much less major items that will need taking care of during home ownership.

And- In regards to Corey who states VA loans are safe. Of course they are! #1 The military is not going to lay off their personnel AND if payments are not made.. guess who can garnish wages to make the loan payments?? and then of course as Corey also stated, VA's underwriting guidelines are more in line with reality because they have to keep their military safe from undue stress of being financially strapped and (possibly) target for looking for money elsewhere because of financial trouble.  Now why we don't have guidelines across the board like VA does... who knows???  That would make too much sense..

So true, the government gets involved and it all over!!

I think what is correct is that we are getting right back into the same pattern. What is that Buyers motive to keep making house payments when prices have dropped, it needs repairs and the wife left?  How many people walked away from morgages because their loan was so far above actual value, not because they couldn't pay?  I agree that we all sell houses and just hope the buyers can get qualified.  Most of us didn't agree with the lending guidelines before and probably won't again.  This post is about that forget what the letters are in front of the loan. 

Whenever the government gets involved things always get messed up. Look at the HVCC (the Home Valuation Code of Conduct) where everyone is removed from speaking to an appraiser doing an appraisal.

Some of the commenters are confused about VA loans.  First of all, military wages can't be garnished.  Secondly, many of the VA loans are to Veterans who are no longer in military service nor retired - they served their country and moved on to another career; so they don't have the job security you speak of any more than anyone else.  It may, however, have something to do with the character of military members being more likely to pay their debts and take their obligations seriously.

Drick, you are right. As far as ex-military people being more responsible about paying their debts, that's a debatable point, though. What I do know though is that VA's guidelines are very commonsense, knowing that the borrower will still need money after the mortgage, cars and credit cards are paid to buy food, auto insurance, car insurance, utilities, school fees for the kids, clothes, etc. FHA, Fannie Mae and Freddie Mac don't take this account then they wonder why their default rate is so high and blame it on the loan officer and the underwriter rather than their own lax approval guidelines.

Of course, it's always easier to "fix" someone else than admit you might be wrong and fix yourself. That is why we are seeing so many "lender overlays" which are more conservative than Fannie, Freddie, FHA, VA or USDA guidelines. Lenders are getting tired of being blamed for, and stuck with, the bad loans that were underwritten to the letter to Fannie, Freddie, etc. guidelines. For instance, FHA allows FICO scores down to 580, however you'll be hard-pressed to find a lender willing to underwrite and fund a loan for a borrower with less than a 620 FICO score.

USDA, although underwritten very closely to FHA guidelines, sticks religiously to the 41% DTI guideline. There are no compensating factors like a better FICO score or large savings account to justify an approval up to 55% DTI. Not allowing higher DTI ratios may be factor in USDA's lower default rate, also.

I disagree one several counts!  VA has offered 100% and upside down loans and yet they have had the lowest default rates in the nation.  Every car loan offered is based on a commodity that is guaranteed to loose value and yet they are still effective.

I just closed VA loan in Meridian, Idaho last month in which the buyer put down $2,000 in earnest money and he got a 100% loan, financed in his VA funding fee so he was over 100% LTV and got his entire $2,000 back at closing.  I had several lenders turn him down based on debt to income ratios since their primary income was retirement and social security.  However, his income was tax free so it was "comped up" and his payment is less than his previous rental payment was and he had a two year perfect history paying the higher amount.

I would be willing to bet my entire commission on fact that even though he knew he was upside down on day one, that he will not be a mortgage fatality!

At least they will turn someone for a USDA loan if the MAKE TOO MUCH MONEY! Yes that is a reason to turn someone down. They will not give a USDA loan to someone who can afford it with no problem.

Go figure.

Alan, the stated mission of USDA Rural Development is: "Single Family Housing Programs provide homeownership opportunities to low- and moderate-income rural Americans through several loan, grant, and loan guarantee programs."

It has never been intended to be used by rich people who can afford to put down 5% but don't want to. That is the target market for Conventional loans.

I would favor the USDA program loans against the No Doc, Stated income loans,  definitely long before calling USDA a Sub Prime.  There are alotof buyers in this category that need to refurbish the homes. This price point doesn't carry with it a whole lot of homes of premium choices, most are fixers that need 6% or better improvements. I do not know of many home buyers that have 20% to put down and then another 6% to improve the home to a comfortable refurbishment.

Before the USDA buyers could not buy anything in their qualified price points, TODAY there are homes are at that level.

Well in this day and age it is hard to predict anything or how anyone will react.  I too feel we still need loan programs to assist those and not limited to first time homebuyers who are dedicated to making the payments as promised.  I don't believe anyone wakes up in the morning saying that they want to go through the struggles of financial difficulty and emotional turmoil that a short sale or foreclosure or bankruptcy evoke.

We all started with our first mortgage, the majority of us wondered how we would ever make the payment, I stayed awake myself for three days after signing my first purchase and sales agreement as a buyer, I took it very seriously and I believe the majority of buyers out there realize the great opportunity for themselves as well as stability for their family living in a home of their own.

I do hope loan programs continue to give opportunity to potential good candidates for mortgages.

I had to be the 46th person to give an opinion on this thread

You can read it at A Directed Response to: USDA the New Subprime Lender

Great post, anmother generatin of future forclosures, keep those buyers and addresses in your marketing file, they'll need you in about a year!!!! 

Thanks for the input, latinafunny. I agree with you and your position. From where I stand, and as I've stated above, 100% financing to people buying a primary residence wasn't the problem. 100% finacing to "investors" was not wise by any means. Whether there was skin in the game or not has nothing to do with a home owner losing their job and not being able to make their house payment. More skin in the game would only benefit the bank's position in the foreclosure, it has nothing to do with how responsible a home buyer is or whether they want to be living in a homeless shelter five years after buying a home. If you lose your job and can't make your payments you've lost your job and your home, it doesn't matter if you put down nothing or 50%.

As far as 100% goes: The only people stating that is HUD, Fannie Mae and Freddie Mac, and that's all based on their own studies that homes with 100% financing default more often. There has been no independent studies to back that up. It's simply HUD and the GSE's shifting the blame to someone else. But the government, the media and the American public take their word at face value and blame each other rather than shifting blame to where blame is due: Wall Street.

Why Wall Street? Because it is short-term profit driven. Investors only care about what the companies they have invested in are doing for them today. Damn the future. To meet investor expectations companies cut jobs to increase the bottom line profits, because overall that's the only area of business they have any control over. They can't control the economy or the consumer. They can't control the cost of raw materials used in manufacturing. So all they can do is slash jobs or send them overseas where they can get it done cheaper. And for all this our government incentivizes them to do so with tax breaks, etc.

Then they have brainwashed the general public into believing it's their neighbor's fault we're in this mess and shirking themselves of any responsibility for exactly what Wall Street and our Government did to create the bubble and the current recession.

Until we band together as citizens and say "no more", we're going to continue to see more of the same. Unfortunately I don't have too much faith in that because most people are lazy and want their politician to fix it for them rather than do something themselves.

I totally think people should have something invested in the home.  Otherwise, they're just renters spending our money.