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There is nothing wrong with low/zero down payment mortgages!

By
Real Estate Broker/Owner

Far be it for me to disagree with the venerable Mr. Warren Buffet but I just about choked when I read his recent comments regarding mortgage lending and the housing crisis. In his Annual Letter to Berkshire Hathaway shareholders Mr. Buffet indicated that "home purchases should involve an honest-to-God down payment of at least ten percent." This paradoxical statement immediately follows his observation that "commentary about the current housing crisis often ignores the crucial fact that most foreclosures do not occur because a house is worth less than its mortgage (so-called upside down loans)."  So if foreclosures don't occur because of the absence of equity, then what exactly is the purpose of the down payment?

As a mortgage and real estate veteran of nearly 20 years, I am frustrated that the media continues to focus on low down payment and "liar loans" as the primary cause of the current housing crisis (with rising unemployment a legitimate 3rd strike). I am particularly concerned that this misinformed analysis of mortgage defaults is missing key elements of risk and is shaping government lending standards (which now represent the vast majority of the mortgage market) in a way that is counterproductive.

For example, what benefit was derived by HUD's recent increase in the FHA 203B program from 3.0% to 3.5%? Does the government actually believe that a home buyer putting an extra .5% down payment is less likely to default? This while FHA still allows people to qualify with total debt in excess of  50% of their take home pay and with ZERO cash reserves. I guess HUD would rather have their borrowers put every last dime they have into a house rather than save a little for a rainy day...

Personally, I believe that zero/low down payment loan programs can perform at high rates under any market condition within the context of proper lending guidelines. These guidelines would include full income documentation, debt ratios in line with FNMA/FHLMC (28/36), A DISPOSABLE INCOME REQUIREMENT to ensure that borrowers have enough variable income to afford non-housing items, a liquid reserve requirement the equivalent to 6 months of housing payments, and mortgage insurance to provide 25% coverage for the lender. As a lender I would much rather have a borrower with a more solid capacity to repay and cash reserves rather than a consumer leveraged up to their eyeballs so they can put 10% into a home purchase.

But no, all I hear from business pundits today is that we should be requiring people to put more money down when they buy a home. Like 10% "skin in the game" is really going to make a difference in ANY declining market. Tell that to my neighbor who paid $800,000 for his house 3.5 years ago, is being transferred and is trying to sell his home for $320,000 today. 

Fortunately there are a few low down payment options still available. FHA offers $100 down payments on HUD owned properties in addition to their standard 3.5% down payment requirement on non-HUD listings (down payment can still be a gift). FNMA is currently offering 3% down payment loans with no mortgage insurance on its REO listings. And of course there are still "zero down" VA and USDA loans for those who meet the requirements.

The markets I serve, Litchfield Park, Goodyear, Surprise, Avondale and Glendale, AZ have a decent selection of HUD & FNMA REO properties that I can show to clients looking for a low down payment option, so it hasn't affected my business as much. But I can't wait for the day when sensible lending guidelines return and these programs will be more widely available.  

Comments (6)

Chuck" The Don" Donato
Keller Williams, Chino Hills - Chino Hills, CA
James, Absolutely right on. The only guilt FHA should feel is not keeping their maximum loan limits current with County medium home prices. Fannie Mae and Freddie Mac never offered sub prime products as far as I know and then to allow W2 wage earners to go SISA or SIVA makes no sense. The blame should rest where it belongs on poor judgement by Wall Street and Non Goverment programs
Mar 04, 2009 03:47 AM
Melissa Cochran
Hunt-Miller Insurance Agency - Macon, GA
I have to say, the proverbial nail has been hit on the proverbial head.
Mar 04, 2009 04:00 AM
Roger Johnson
Hickory, NC
I've said it before, the down payment has little to do with percentage to default. A borrower's creditworthiness and their ability to pay (coupled with savings) is a much stronger coorelation. What the "experts" are doing is saying, "see this high rate of default? These were all no down payment loans." They aren't looking at the type of loan it was (you mentioned 'liar loans' one good example). This is still just a knee-jerk reaction from lenders that made bad decisions before and now are attempting to 'tighten' their standards, apparently to the point that their completely out of reach of any normal person.
Mar 04, 2009 04:27 AM
James "J.R." Samsing
Litchfield Park, AZ
Absolutely, Roger! Nearly all of the 80/20's written the last few years had 50% (or higher) DTI requirements, low Fico minimums, and low reserve requirements. That's why they default at a higher rate as compared to conforming loans...not because they were 100% LTV. But the current rate of default on all "subprime" loans (around 16%) should not have been enough to cause the collapse of mortgage securitizers/investment banks. The ultimate culprit was the leverage created by using Credit Default Swaps and CDOs to make extended bets on these loan pools. They are what transformed $5B in workable losses on MBS pools to company killing $30B write downs.
Mar 04, 2009 04:44 AM
Lewis Poretz
Apex Home Loans - Annapolis, MD
Business Development Manager

Well stated - underwrite a DPA loan with no money in the deal on an FHA purchase today ( I know DPA's are gone, but hang with me ) Using today's underwriting guidelines, these loans will perform!

Mar 04, 2009 01:08 PM
Stephen Kappre
KW Hometown - Mantua, NJ
Helping You Home
I like the USDA program BECAUSE it is strict on debt-ratio. YOu don't get the borrower with a 55% Debt Ratio. 100% is fair for a good borrower. Good credit, living within their means. Certainly VA has done it long enough.
Mar 04, 2009 11:27 PM