Is 20 Percent Down the Solution? Would the Real Estate Market then Crumble?

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Mortgage and Lending with Social Media - Infinity Home Mortgage Company, Inc

 

Is 20 Percent Down the Solution? Would the Real Estate Market then Crumble?


An unstable economy - maybe a crumbling economy - will it matter after today? Can one say rapture?

There has been a lot of talk about QRM, 20 percent down, and much more. For the purpose of this post, let's forget about QRM, politics, what types of mortgages this will affect, and just keep this simple. More skin in the game for borrowers is the issue. Yes or No.

I have been wanting to talk about this for a few months, but I was inspired after reading this post by Bryan Robertson. ~ Why is NAR fighting the 20% rule in QRM? ~ Regarding Bryan's post, the one thing I do agree with is that home ownership is not a right, but a privilege. And that some lending guidelines were too loose.

I am wondering if we can agree on two things. Can we all say that the economy is not as good as it once was prior to 2006? And can we say that the economy is dependent on the real estate market by over 20 percent?

Three of the biggest arguments that have been floating around regarding the mortgage mess and our economy.....

1.)  The lenders were too greedy with some of their mortgage programs, such as 100 percent no doc and stated doc loans.

2.)  Little skin in the game caused the mortgage meltdown.

3.)  Loss of jobs, loss of income.

 

 

 

Consumers upside down on their homes - upside down on their mortgages

One main issue that bothers me profusely, the reasons why people choose to walk away from their homes, because they were upside down on their homes, upside down on their mortgages. And so many state the main reason for this was because they should have put more down as a down payment, because home values dropped. Here is a comment that just scares me...

"The more skin in the game, the more likely one will fight extra hard to protect their investment. There's no two ways around it."

Then please explain the hundreds of thousands of strategic defaults that have plagued the foreclosure numbers. I have spoken to a dozen or so myself that had no problem financially in paying their mortgage payments and other debts. But just because they were upside down on their home, they walked away. Can I ask one simple question? Why? What was the main reason for buying that home in the first place? This will be another blog post topic in a few days.

Read : More than 28% of homeowners are underwater

 

You want shocking input?? Kenneth R. Harney wrote Who's most likely to walk away from their

 

 

Jeff Belonger's Opinions Regarding Less Down or More Down

 

~ Pros of 20 percent down or more ~

  • Security - More skin in the game makes for a better buyer, homeowner. Me? False hope that it will keep more people in their homes, that they are better buyers. 

Quick Rebuttal - Define better buyer. FHA has been around since 1934, allowing for 2% to 3% down payments. You also have VA loans and USDA loans that allow for 100 percent financing. All three of these types of mortgages have been performing well up until 2006, when the whole mortgage meltdown began. One can say that subprime loans had a lot to do with this. Loan officers putting borrowers into loans with higher rates or worse subprime program types, just because it was easier than a FHA loan, making it easier for the loan officer, but worse for the borrower. Sorry people, but this is a fact that I have witnessed first hand and even asked certain loan officers during that borrowers mortgage process.

 

~ Cons of 20 percent down or more ~

  • Stripping away Cash, Savings, Reserves - If I had a choice of putting down 3.5 percent or 5 percent over 20 percent, I would do the lesser. Why? Unless I had a million dollars in the bank, it allows me to have access to more cash on hand for emergencies. And I have shown in prior blog posts, the differences with 5% down compared to 20% down. Besides, your house is no longer an ATM. It's much harder to get cash out once you put it down.

Quick Rebuttal - The buyer would just have to save more to have cash left over, having reserves.

Negative Impact of more down - The borrower might have nothing left over for emergencies such as a loss of job, a death in the family, or even to fix important issues regarding the house.

  • Economy gets even worse - Would more jobs be lost if the housing economy dried up? In my opinion, 110% yes. Anything from new construction, to remodeling homes, to home repair stores, and those that make such materials for everything just mentioned. Kind of like the food chain.

Quick Rebuttal - I honestly can't think of one, can you?

 

 

 

Let's look at some facts.....

How long do you think it would take for someone in today's economy to save 10 percent, or even 20 percent. Here are some figures compiled by specific groups and independent companies. See chart :

 

Savings chart

 

Let's see, it could take the average person 9 years just to save 10 percent down. What so many fail to realize, that we are talking about the average person. There are so many different factors that play into the role of saving money. 

  • Does a family only have one household income? How many in that household?
  • The cost of living is higher than it has been in recent years and decades. Just look at the food prices and or gas prices, which in many cases, out-weigh what one makes on a monthly basis.
  • Unknown debts that the average person does not always have, such as student loans, taking care of their parents, medical issues, etc, etc.

 

I have heard and seen most of it regarding these reasons in my 18 years in the mortgage business. It's been stated by several groups and those doing surveys and studies, that "High down payment and equity requirements will not have meaningful impact on default rates."  

Let's look at a $250,000 purchase price. If I put 5% down, my mortgage would be $237,500 and if I put 20% down, my mortgage would be $200,000. Do you know what the difference in mortgage payment would be? $201.00 a month. Yes, there will be mortgage insurance, depending on the type of loan program. Mortgage Insurance can be a confusing topic and can also be written off for now. Read : Mortgage Insurance

But let's say your mortgage insurance is an extra $180 a month. If you out 20% down, your total savings is $381.00 a month. But wait, that is an extra $37,500 out of pocket. Ouch... That is about 8 years of saved monies. As you can see, buying a home takes careful planning and consideration. When is it a good time to buy a home?

 

 

 

Conclusion :

 

We need to compare Apples to Apples - People keep comparing today to the 1970's and 1980's when their parents were able to save and put 20 percent down. Many say that it was just as hard back then as it is now to save. I disagree because of several different factors.

By forcing higher down payments, would this not penalize the responsible borrower? Which would make home ownership more expensive or out of reach to millions?

In my opinion, I consider Cash is king and a necessity to survive in today's economy. Since many are screaming about at least making it 10 percent down, here is an example of 3.5% down vs 10% down.

What are your thoughts and opinions? For those reading this, even though I am strongly against making more down a requirement, I still always try to respectfully dissect both sides with pertinent information so I can make a sound decision.

Adam Cohn wrote this post (I love stats and facts - research):

QRM would have cut out 39% of homebuyers in 2010: CoreLogic

 

 

Solutions? Calls to Action?

Understand the facts before screaming for such ludicrous changes that could kill the housing market. I do believe in tweaking some of the mortgage guidelines. Such as :

  • Stronger debt ratios
  • Required reserves

 

Here are some scary facts and not just opinions.

Understand the types of people that would truly walk away from their homes.

 

Maybe the economy would rebound better if the mortgage servicers improved. Recovery depends on mortgage servicers?

Maybe higher escrows withheld on jumbo loans? Fed rules on jumbo escrow requirements

 

Call to Action - If you believe in my thought process, print or e-mail this and send it to your Congress person, to other realtors, agencies....

 

One of my calls to action that I wrote about in June of 2009 :

Call to Action - We must fix the real estate market ourselves !!!

 

 

Jeff's cliff notes (remember those?  In my opinion, here are 3 excellent comments out of the 240 + from Bryan Robertson's post mentioned above. Keeping in mind that I have only read about 60 of the comments and not in any order)

Karen Hunt - comment # 167 - Unemployment, tax structure, and lax banking guidelines.

Brian Hoffman - comment # 169 - If forced to put 20% down only, economy would crash.

Dave Jerierski - comment #203 - 20% doesn't guarantee loan payments.

 

 

I wrote about tougher guidelines about a week ago.

Realtors can't sell!!! - Because of Tight Mortgage Guidelines?

Are mortgage guidelines actually tougher? I don't really think so. I think it begins with the loan officer properly educating both the consumer and realtor, and setting expectations to a certain level before one sets out to buy a home. How many of the loans that didn't closed in the last 12 months were probably do to loan officer errors not understanding credit, credit scores, or their lending guidelines.... and not just because the person didn't qualify, which should have been mentioned previous to the agreement of sale.

 

"Fight or argue with facts and not just your heart on your sleeve."

 

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Copyright © 2011 by Jeff Belonger of Infinity Home Mortgage Company, Inc

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Re-Blogged 2 times:

Re-Blogged By Re-Blogged At
  1. J. Philip Faranda 05/21/2011 04:22 PM
  2. Connie Harvey 05/22/2011 10:34 AM
  3. Cory Barbee 05/23/2011 07:32 AM
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Anonymous
Kathie Searls

20% down is  overkill. In my market the majority of buyers are using USDA or FHA loans. These are responsible, hard working people who are not purchasing over their means.  20% down for any conventional or otherwise would be a death wish to realestate.  Make the lenders be more responsible on assisting homeowners in trouble by answering their phones with legitamite answers and not giving the run around.  Majority of homeowners give up when they cant get the bank to respond to their call for help

May 23, 2011 03:00 AM #66
Rainer
51,801
Eric Brickley
Zenith Mortgage Advisors (Milford,MA) - Framingham, MA

Great read and thank you for all the links. It infuriates me when the government steps in and thinks they are protecting the people and we can see their efforts are everything but....

May 23, 2011 04:00 AM #67
Rainer
29,732
Brandon Hoffman
RE/MAX Connected - Irmo, SC

Excellent points. I hate to think what would happen to the economy if this happens. One thing I hadn't considered was with the home values further deteriorating the increase in the number of people that would simply walk away.

May 23, 2011 04:41 AM #68
Rainer
156,029
Annette Sievert
CB Valley Broker - Corvallis, OR
Corvallis, Oregon

In essence, markets find a way, it is an economic law and governments of oll couleur have tried to cahnge them over the last centuries, at the end it never works. In my opinion it needs to be "allowed" to buy a house when you can afford it, be it in payments or down payment and people need to be "allowed" to run their own risks. What should not be allowed it bailing them out and sugar coat what will happen when they default.

So what might be a good idea, coming from lenders rather than Big Brother, is education before lending, making is mandatory to go through a class that involves in drastic terms the risks and how to asses that risk. Otherwise 20, 30 or 50% will not really change the outcome

May 23, 2011 04:41 AM #69
Rainer
343,432
Ray Waisler
Finance of America - Atlanta, GA
NMLS #6621 - Specializing in Jumbo FHA & VA

Jeff,QRM goes deeper than just 20% down. It dictates strict DTI requirements as well as debt obligation maintenance. I believe QRM has the potential to increase rates, tighten money to lend further or both.  I wrote a post about this just yesterday.

May 23, 2011 05:32 AM #70
Rainer
60,433
Lee Ann Obenauer
Metro Roberts Realty - Buffalo, NY

Jeff: Great post.  I do not believe in 20% down. I work mostly in a rural area where most homes are under $100,000.  These buyers could not save $20,000 in a lifetime to buy a home but certainly could pay a $500 a month in mortgage, which is cheaper than renting.  I think the problem is the lax in rules and issuing mortgages that people cannot afford to pay. 

May 23, 2011 06:04 AM #71
Rainmaker
159,151
Deborah "Dee Dee" Garvin
C2 Financial - San Diego, CA
C2 Financial

Jeff,  You must know I agree with you completely.  I believe the focus on the QRM and 20% dp is the equivalent of "shutting the barn door after the horse is out"!  As we both know VA loans (with zero dp) are the best performing loan products in the market place and FHA performs very well AND has been around for a long time.

What was not (and IS NOT now) were the stated income, NISA, NINA, option arms with zero down on stated income...we all know the product mix of the early 2000's.  Add the fact that investors and lenders were pushing these products (case in point...working as a lender I lost TONS of loans to competitors because they were offering brokers rebates of 4% compared to my measly 3% max).  AND, anybody with a pulse could leave their job at the local shoe store to make tons of money as a "loan officer".  Also, consumers had to buy right away because the rise in housing prices were going up so fast that they were about to miss the opportunity.  Or, consumers were using their houses as piggy banks and/or paying on the "come" of guaranteed appreciation.

In short, there is no one party to blame; however, if the investors/lenders did not offer the product they would not have been sold.  

Now, the offending products are non-existent (a shame because there is no such thing as a "bad" loan product...just bad counseling and bad execution on the banking front).  We have loan products that have been around for decades and worked prefectly fine for many years.  Remember the FNMA Community Home Buyer Program?  3.5 to 5 percent down without the FHA upfront MI...I taught the classes and built my initial business on the program (in opposition to FHA due to loan limits...Seattle's market, like CA, was totally over the FHA limits).  Cannot tell you how many I closed.  And, to my knowledge not one foreclosure or short sale in the bunch.

Education and correct counseling are what the finance world needs (of which you do an excellent job, BTW), not higher down payment.  Thanks for all your posts and sorry for the length of this comment.

May 23, 2011 07:12 AM #72
Rainer
123,029
Cory Barbee
San Diego, CA
Broker (760) 563-4022

Great post...I don't believe the 20% rule is the answer and I don't believe that Congress believes this either. The mindset of Americans in relation to greed, instant gratification, instant wealth through real estate needs to change. There are a lot of financially responsible people out there who don't have a lot of money and would be great fiscally responsible homeowners...

May 23, 2011 07:13 AM #73
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Karen Hurst
RICOASTALLIVING.COM - Warwick, RI
Rhode Island Waterfront!

Jeff,

I just finished reading all the comments and most of your links! Exhausting!

There are so many complications and opinions that it's almost impossible for everyone to agree on anything. Are you keeping score?  

  To me, an income level should have a lot to do with the QRM requirement. Realistically speaking, if you are not making much, you have a much harder time saving for a down payment, but that does not mean you wont work hard to keep your house.

Asking "what are the reasons for buying" is probably the single most important question, to me, that you asked.

For the average person, if you are buying a house to use as a HOME, then you will do everything to keep it.

I am speaking from personal and professional experience.  Even if you paid cash for your HOME a few years ago, you are legitimately UNDER WATER.  Are you living there? 

Strategic defaulting may have been termed a "business decision", but obviously the house was looked at as a business and not a home.

Another good question would be...If you paid cash for your home and now its worth less, would you walk away?   Probably not, so there is something to be said for Skin in the game.

I could write all night but I won't. I think this is the best post I have seen about these subjects and although its hard to keep it down to one question, you did a great job.

May 23, 2011 07:28 AM #74
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Jeff Belonger
Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ
The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans

 

BRYAN....comment #34.. .  first off, as I stated in my first paragraph and more so in my send sentence, this was not about QRM. I know your post was about that and lenders with more skin in the game. I wanted to focus about the argument with just 20% down from borrowers, and that's it. This argument has been around for the last 3 years, in which case I wrote about it back in 2009 and 2010, and gave links above.

With that said.. I do agree that Americans aren't savers... but again, that is not my focus either... because it comes down to a good buyer vs a bad buyer... and having 20% down doesn't make that buyer a good buyer. Do you agree or don't agree?

One thing I do want to address... you said your would support QRM if 10% down and tighter ratios. Again, for arguments sake, 10% down or more would not be the solution. What I would fight for is for common sense debt-to-income ratios and some sort of cash-reserve after closing. And that we need to focus on credit-worthiness and education. Thanks for your input and feedback.. and for the polite compliment.

 

May 23, 2011 07:30 AM #75
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Jeff Belonger
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DAVE... comment # 35.. . I get what you are saying.  One quick question then... how long do you think it would all take, to where it would help out our economy then? Let me add my .02... making more rent, would leave more houses for sale, which would hurt the economy now, not later. There is a major food chain involved in the housing market.

So, what you stated, might be good 10 years down the road, but would we even be around then? Would we be like Russia? I think so... and it would be even worse than it is now... In my opinion, we need for the housing market to stabilize sooner than later.  thanks for your input.

 

MISSY.... . I think that is a huge issue that you have hit the nail on the head.  Credit worthiness... why can't we focus on this the most. For many years, lenders focused on credit scores, lower credit scores, and look where that got us. Sure, I will agree that there are still good buyers with 600 credit scores, maybe 580... but in most of those cases, I found that it would take me 2 to 4 months to get their scores up to 620 or 640. That is not a death sentence, right? Thanks for your insight, as some of us agree on this same topic.

PAT... . thanks for stopping by and for making an exception.. I am honored.. thanks

PAUL.... . why would 20% down just lose the first time homebuyer? How about many buyers, even those that aren't first time homebuyers. You need to think on a national level and not just your local market. Many that sell are either breaking even or have to come up with cash. So they still would need the full 20% down to buy their next home.  Just sayin... But yes, making it 20% down or more across the board would hurt the economy even more. thanks

PATRICIA...comment # 39... . but this is not even the lenders argument.. it's congress and some others... and we need to make them understand what would happen.. someone needs to have common sense and look at this from all angles. thanks

DEBBY... . several of us have stated the same, that gov't needs to stay out of it.. and yes, jobs in my opinion would seem to be the most important thing to focus on, that would help with many of the issues mentioned above. thanks

LINDA.... . ah, the easy fix.. and ah, what looks easy on the surface. I think that is half our problem within today's gov't, that on the surface, they just say this or that, because the average person would agree... without dissecting it like I did in the post. thanks

WAYNE... . I don't dismiss that this is a complicated subject, which I kind of shown in the post... but you make an excellent point, that the gov't and anyone else up top, lack the true and real connection that is needed in order to have good insight on this matter... and or, for those to stop relying on the so-called experts in our industry, that also have no real clue. These people irk the hell out of me also... and thanks for the polite compliment.

CARLA... comment # 46.. . sure, having stronger portfolio's is a great goal.. but I wanted to really keep political and banking side out of it and just debate 20% down vs the buyer... and nobody else. Regarding the banks?  This would help them and shut more lenders and brokers out of the business. thanks

 

May 23, 2011 07:49 AM #76
Rainer
241,003
Jesse Skolkin
Independent New York State Certified Real Estate Appraiser - Fresh Meadows, NY

Jeff:

Your first paragraph was:

"There has been a lot of talk about QRM, 20 percent down, and much more. For the purpose of this post, let's forget about QRM, politics, what types of mortgages this will affect, and just keep this simple. More skin in the game is the issue. Yes or No."

Based on your last two sentences in that paragraph, I believe that I was on track by discussing the fact that lenders don't have as much "skin in the game" as they used to.  Based on your first paragraph, I didn't get that you wanted this discussion to be solely about 20% down payments for borrowers.

May 23, 2011 08:43 AM #77
Rainer
158,858
Adam Mallory
eBroker Real Estate 619-566-ADAM - San Diego, CA
Broker, ABR, e-Pro

I guess a way to prove or disprove this is to find out what percentage of defaulted loans (over the last 5 years) were made with 20% down payments.  Of course, that still isn't going to capture the folks that strategically defaulted on their loan(s).

May 23, 2011 09:08 AM #78
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Christine Donovan
Donovan Blatt Realty - Costa Mesa, CA
Broker/Attorney 714-319-9751 DRE01267479 - Costa M

Jeff - This is a well-reasoned post.  I tend to agree with many of your points and think that even people with skin in the game may choose to default if their homes are significantly upside down.  I also think the point that many times not being cash poor can make a huge difference in the ability and/or choice to hang on when things are going sideways.

May 23, 2011 11:19 AM #79
Anonymous
Therese Reid

Sadly, the talk of the QRM ruling / subsequent 20% down is government's way of getting us riled up about one issue so the real mess they are putting forth behind the scenes goes in place with little to no one watching....God forbid should the right hand know what the left hand is doing.   I completely agree with the poster that paraphrased its like shutting the barn door after the horse is out.  20% down after all this?  Too Late.

May 23, 2011 11:23 AM #80
Rainmaker
546,308
Jeff&Grace Safrin
F.C.Tucker 1st Team Real Estate - Valparaiso, IN
SpousesSellingHousesTM

 Jeff, we've seen defaults in 20 % to 40% down loans as well - they are usually emotional circumstances i.e. death of a spouse, divorce, substance abuse, incarceration, terminal illness, or just plain overleveraging-owning too many propteries and letting some go.

May 23, 2011 12:38 PM #81
Rainmaker
323,315
Fred Cope
Reliant Realty in Nashville, TN - Nashville, TN
Looking For Homes With A Smile

Jeff,

My experience is that the size of the downpayment is much less a factor in mortgage defaults than some think.  IF the size of the downpayment were inversely proportional to the default rate, WE VETERANS WOULD ALL BE HOMELESS.  So I say "NONSENSE" to the critics of low downpayment loans.

I think you nailed the true culprits:

(1) Applicants with sub-par credit histories.

(2) Lenders abandonment of sound underwriting principles.

(3) Politicians meddling in homeownership.

(4) Loss of Jobs, increased expenses, and the ever-present "Unforseen catastrophies of Life" such as illness and high medical expenses.

Things will get better when:

(A) Washington DC stops trying to fix things,

(B) The excess housing inventory deminishes, and

(C) The consumer takes responsibility for his/her own actions.

In the meantime, REALTORS® and mortgage professionals must keep a positive attitude, see the flower in the wall (home values are great for buyers), and be prepared for higher interest rates (they are coming).

We are AMERICANS and we are up to the challenge. 

May 23, 2011 01:26 PM #82
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Jeff Belonger
Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ
The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans

 

COLLEEN...comment # 47.. . you say it's not likely to happen, but it still scares me, because they have been pushing hard off and on for the last 2 1/2 yrs. As much as you mentioned QRM and lenders, which was not my focus if you read my first paragraph, you did bring up a good point about credit worthiness. And that is where my focus would be, not larger down payments.. thanks

LINDA... . regarding your comment if home prices would drop, that down payments would be easier. In theory, that sounds good... but look at hard cold numbers. $300,000 house drops to $200,000... 20% down.. you got from $60,000 to $40,000. Yes, 20k difference is huge.. but 40 k down? Still very high for the average person. 150 to 100k sales price, going from 30 k down to 20 k down. $20,000 down is still steep for many. So, in theory, in ones head, your statement sounds good. On paper?  Not so good. Would you agree? Disagree? But yes, we both agree that jobs is the main issue... well, should be the main focus, which doesn't always seem like it up on Capital Hill or with the President. thanks

LESLIE.... . wash them first? lol  Seriously... in my opinion, I think you are still missing the main point. I am not talking about who is paying for the previous meltdown aka mortgage mess... I am not talking politics or about taxes, tarp monies, who is profiting, etc, etc. It's whether or not larger skin in the game is the right solution.  Thanks

ROBERT... . I would agree with your comment... we just need to get those on Capital Hill to understand and agree.. and to move on to something more important.

ERICA...comment # 54.. . I am aware about your area and would agree... just as the examples that I gave to Linda in a few comments above... many are struggling, when it comes to tuition, regular bills, higher education, higher health care, and so much more. thanks

JERRY.... . I think that is the main issue, how do you keep people from defaulting... and many think it is having larger down payments. They need to read and understand these studies. Not sure why they can't grasp this.. thanks and thanks for the compliment.

SINEAD... . I always love charts and or graphs, because they can help you visualize better... but only if they are correct. And yes, we agree, more down would kill the real estate market. thanks

LYNN.... . I think there are many gray areas, which many people don't seem to understand... and I agree, a homeowner should not be restricted and have to put more down. And thanks for the polite compliment.

MICHAEL...comment # 58.. . yes, I think it is over-kill and as many of us stated, we need to focus on the credit worthiness of borrowers.  thanks

 

May 23, 2011 05:26 PM #83
Rainmaker
1,431,655
Gene Riemenschneider
Home Point Real Estate - Brentwood, CA
Turning Houses into Homes

I posted on lending just today in response to Ryan's post featured in the Rain Drop.  I will not add a link as I know it is a violation of rules.

One point you make is the seeming willingness of people to walk away even when they can afford it still.  There seems to be a break down in the basic social contract or honor.  In my opinion the problem with the break down here started at the top. 

The captains of industry did not go down with the ship - they lead the looting!

May 24, 2011 07:10 AM #84
Anonymous
Robert Heider

I think we are missing the larger picture.  Given that savings accounts generally have a negative appreciation 0.25%/annum vs 3+% inflation rates, any buyer is pushing a serious uphill battle. The real problem, in my opinion is how may buyers would it take out of the market and for how long? To me, this is like going back the 18% A credit mortgages of the late 1980's.  There will still be people that can afford and will buy real estate, but prices will fall drastically in the process.

May 30, 2011 03:10 AM #85
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