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.

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.

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.

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.