My thought on these programs has always been the simplistic, "Gosh, if someone can't afford to save for a 3% downpayment, how the heck are they going to be able to budget for the maintenance requirements of a house."
"Gosh, if someone can't afford to save for a 3% downpayment, how the heck are they going to be able to budget for the maintenance requirements of a house."
Well, I'll say this in FHA's defense: concerns about that have always been built into the program.
Why did a lot of these underskilled, lazy-assed brokers put FTHBs in subprime loans instead of good old FHA loans? Because FHA appraisal rules are Mean and Strict. They have always been. FHA appraisals are a lot more like a rigorous property inspection than a conventional appraisal, and FHA basically makes the seller do necessary repairs before the deal can close.
It's partly a concern about the borrower's ability to handle repairs in the early years of the loan, but it's also a historical concern with not using the FHA program to foist unsafe, unsound, wretched properties off onto naive young borrowers under the "fixer upper" banner.
Again, I'm not arguing in favor of no-down programs. I am merely pointing out that FHA lost "market share" in a lot of places not because the maximum loan amount is too low or because the borrowers couldn't meet the credit standards. It was because loan originators didn't want to go to all the time and trouble of following the rules.
And every time I hear the term "modernization," I want to reach for my 20-pound bound copy of 4155.1 (the FHA bible) to beat off the barbarians. It is so often code for getting rid of these persnicketty old rules, like the property repair requirements, that will just result in more FTHBs without reserves defaulting when the freaking porch falls off two weeks after closing.
Ever since hearing about these "innovations" I have wondered how they became available in the first place. I bought a house on an extremely limited income in 1989, and I remember quite vividly how thoroughly our finances were checked; especially the sources of our downpayment. I was under the impression that even a gift from family was suspect as it might be a (disallowed, I was led to believe) hidden loan. Can you pinpoint when this became acceptable and why? Or was it always lurking on the fringes of financing options, and simply became more "respectable"?
Funny that you mention about the repairs; one sticking point became who would replace a cracked window in an attic dormer (on an 80 yr old house with far more pressing concerns, in our opinion). But I believe this was an FHA regulation and we had to address it before the deal went through.
Tanta - you are the wind beneath our understanding. Thanks.
Have you seen Jubak's column this a.m. ? Very interesting. Make builders, lenders fix the housing mess - MSN Money
Make builders, lenders fix the housing mess
The housing industry showed incredible creativity when it came to qualifying people for mortgages they couldn't afford. Let's make its leaders put their thinking caps on again and fix the problem.
Makes sense to me. What do you think ?
You've waxed very eloquent on all the breakage where interest in pumping deals 'cause folks make their money from that rather than making "good" loans drives them to idiocies.
How would you fix this ? In broad terms - that is what strategic principles can we all push on our legislators before something really stupid is put in place ?
The problem that I have with "zero down" is macro-economic, not moral. The down payment is, in effect, a governor on the expansion of credit like reserves in the banking system. With essentially unregulated securitization, zero down programs have helped to accelerate the expansion of credit to a unhealthy and, it is turning out, unsustainable degree.
ratefink, these seller-funded DAPs really became a noticeable source of FHA loans in around 1997. The first time HUD tried to ban them was in 1999-2000. By then they were fighting off the "compassionate conservatives." The HUD IG's office has been issuing steadily more upset reports about these practices since then. But the lobby has been winning.
The real change in momentum came when the IRS finally declared them a scam and challenged their "nonprofit" status. Even after that, though, there's a huge lobby supporting them.
You're absolutely correct that in traditional FHA underwriting, even gifts from family members are "sourced" and documented. FHA isn't naive; it has always known that abuse can lurk whenever funds are gifted.
And yes, FHA has this reputation for involving time-consuming and apparently "trivial" things like forcing the repair of a broken attic window before a loan can close. But, well, it involves government insurance of very high LTV loans. Back when FHA was the only game in town, sellers quit whining and fixed the freakin' window.
Ya think conventional subprime lenders ever worry about such things? Nope. So now we've got people wanting FHA to follow dumb lenders down, rather than using the implosion of the subprime lenders to reassert basic principles of low income high LTV lending.
Those principles will always end up generating a few requirements that can seem silly or nitpicky. BFD, as far as I'm concerned. It's the price you pay, and we used to not consider waiting another few weeks to close to be a big price to pay.
It is, precisely, the kind of sleazy, conflict-ridden, self-serving "initiative...." that thrives in an environment where regulation is dismantled or unenforced and "government" is bashed with one hand and milked with the other.
Juxtaposes nicely with "The loss side has hit us much harder and more quickly than we could ever have anticipated."
Well, I confess that the mental image of the Tanned One being made to stay after school to clean up the mess sent hot coffee dangerously close to my nasal passages.
I have been arguing all along for making the perps clean the mess up. That's why I favor workouts: make them rewrite those loans the way they should have written them in the first place. If it means that mortgage lending becomes merely profitable, as opposed to obscenely profitable, well, I used up my tissues laughing over it, so don't expect me to cry.
Same with an idle proposal I made a while ago to make the rating agencies shoulder some cleanup responsibilities.
Frankly, though, we aren't going to get anywhere until we really give up on the "homeownership is always and everywhere a good thing for people" article of faith. As long as that one still has legs, then anything that "puts poor workin' folks" into loans is automatically good, and anything that might increase the cost of credit is automatically bad. And so any proposal to wring the bailout costs out of the industry gets waylaid by the claim that it will raise the cost of homeownership, as if it's the cost of credit, not the cost of homes, that is the issue.
Would it be all right to print this article, attributed to you, and send a copy to my legislators with my comments?
Certainly. You can even invite the little buggers to come read a blog and, hey! leave a comment defending their position. It'd be, like, interacting with constituents or something instead of just lobbyists.
I sold a home last year and the buyer did one of these. When I signed the sales contract it stated the buyer was pre-approved for a conventional mortgage. I thought "great, they have their down payment and this should be easy" so we signed the deal. At closing I was handed my sales contract with some changes for me to sign. Instead of a conventional mortgage the buyer opted for some "seller assistance" program that I was never made aware of. Their broker increased the contract sale price by $5000 and was able to get an appraiser to do a "drive by" appraisal. The $400 fee that I was supposed to pay was somehow buried on he buyers side of the HUD-1 because I refused to pay it (since I didn't hear about it until the day before closing). The sale was recored at the county with an inflated sales price which everyone on the block used as a comp. These buyers apparently didn't have two dimes to rub together for a down payment but were able to buy that house with "seller assistance" that I had no knowledge of until the day before closing. If I thought my property was worth an extra $5000 I would have listed it as such. This one deal had a direct impact on the future sale price of least five sales. In the end I got what I wanted out of the sale so it didn't make much difference to me, but I couldn't believe the buyers were able to pull this off on those terms which had a direct impact on property values nearby.
Why can't we get the Federal Reserve
to manage the social Security Money and be done with it. The Fed can
print money and enhance the returns.
This whole idea of coercing people
to save for retirement through
homeownership is not working, is it?
The insidious element in this is the one Tanta mentions in her 10:44 AM comment -- that "homeownership is always and everywhere a good thing for people".
Tragically, it seems that the ideology of most economists requires them to view inflation in asset prices as different from inflation in goods and services, because they supposedly "can't know what the proper price of assets should be" (to paraphrase Greenspan and others). I had a go-round on this with David Altig (macroblog, U of C, now at the Atlanta Fed ) many months ago; wish I had saved the URL of the comment thread.
Of course, the reason why so many people think not only that home ownership is always and everywhere a good thing, but also that entering into a highly leveraged speculation in housing futures with a home as collateral for the margin loan -- essentially what much "home ownership" has come to amount to -- is always and everywhere a good thing is that loose money and ludicrously favorable tax laws have sent asset prices into the stratosphere.
The question is now: How much longer can the Fed keep money loose enough to keep asset prices in the stratosphere?
Uberthirst?
How about Uberlust?
Reading Tanta does not quench my thirst for more info - it raises my thirst to lust levels.
Yes you rock Tanta.
Alas, in my situation lust is only a misty memory. Too old and too paid off to have any of this knowledge payoff.
Ha Ha
Thanks Tanta - I first came across this when Barrons did an expose of it - hmmmm - 2 years ago - and was shocked.
This information is really useful - the worksheets are really helpful - not for beating "liberals", "do-gooders" over the head with it but to ensure that those who do voluntary, unpaid work in the general advice field are aware of the nefarious enabling organizations that are around and can counter their efforts with real data.
Somehow we need to get through to the public at large, and the legislators, that enabling someone to "buy" a home with no down payment does not make them a "homeowner". Rather, it makes them a real estate speculator operating with infinite leverage, while whoever lent them the money holds title to the home.
Somehow we have to keep this simple.
Maybe the way to do it is to keep hammering on the fact that the real owner is whoever holds the title, and keep pointing out that that ain't the "buyer".
I think that WE all agree that in general, somebody who can't manage to save up 3% isn't really ready to buy a home. It's really only the abnormal appreciation of the past few years that made this LOOK like a good idea.
Perhaps I am just a weird case but I guess I just assumed most people who took 0 down loans were like me (yeah yeah, I know what happens when you assume).
I took out a 0 down loan because at the time I really did not have enough money to both pay the closing costs and make a down payment. I budgeted so that I could afford the payment on both mortgage loans while still being able to save up over time to pay off the "20% down" loan faster over time.
I "owned" the place so I could paint it, or change the carpet, or whatever
I assumed that the loan would help increase my credit score over time as I made my payments, making any refinance easier
Rents in the area I live in are close to mortgage payments
Perhaps it really would have been better to rent for a few years longer from an economic point of view, but it really does feel good to have a house that is "yours" and that you are fully responsible for.
10 yrs ago I got basically the same loan as the example ($102K purchase price)...thru Countrywide (& they were awful...quelle suprise). The real world was a bit different...The closing costs amounted to more than $10K - and that was after my going over each 'garbage fee' and eliminating a lot of them....So really, the "3%" is a bit of a misnomer..It was more like 12-13% but only $3K went to my home purchase....$15K was a lot for a little guy first homebuyer to cough up.....
"its a rare investor that has the foresight to invest correctly and the determination to see it through."
Made me think of a recent Financial Times article:
"Vanguard , one of the worlds biggest fund managers, says it was caught off-guard by the impact of the turmoil in the credit markets on its $25bn in quantitative investments, and believes such strategies will be more volatile than it first thought. [...] Vanguard is best known as a pioneer of index funds, but more than half its money is now actively managed."
Tanta,
I am interested in this because I have a somewhat marginal buyer leasing a house that I hope to sell them in a year or three. The "lease to own" provision is a note on the lease that $100/month of their rent will apply to the purchase of the house should they buy it. The rent is comparable to similar houses in the area, so they are not overpaying on rent. My hope is that the $100/month can apply to their down payment. Is this a forlorn hope?
Robert,
I'm afraid it is. You said the rent is comparable to rents around you. That's the problem. Everyone pays to live somewhere, except for my lazy brother, but that's another story. So if your tenants are paying you fair market rent, then I'm not going to be able to count that $100 monthly, because it's not "on top of" the fair market rent for the property.
My thought on these programs has always been the simplistic, "Gosh, if someone can't afford to save for a 3% downpayment, how the heck are they going to be able to budget for the maintenance requirements of a house."
it's friday mornin, sweetheaeaaart
"Gosh, if someone can't afford to save for a 3% downpayment, how the heck are they going to be able to budget for the maintenance requirements of a house."
Well, I'll say this in FHA's defense: concerns about that have always been built into the program.
Why did a lot of these underskilled, lazy-assed brokers put FTHBs in subprime loans instead of good old FHA loans? Because FHA appraisal rules are Mean and Strict. They have always been. FHA appraisals are a lot more like a rigorous property inspection than a conventional appraisal, and FHA basically makes the seller do necessary repairs before the deal can close.
It's partly a concern about the borrower's ability to handle repairs in the early years of the loan, but it's also a historical concern with not using the FHA program to foist unsafe, unsound, wretched properties off onto naive young borrowers under the "fixer upper" banner.
Again, I'm not arguing in favor of no-down programs. I am merely pointing out that FHA lost "market share" in a lot of places not because the maximum loan amount is too low or because the borrowers couldn't meet the credit standards. It was because loan originators didn't want to go to all the time and trouble of following the rules.
And every time I hear the term "modernization," I want to reach for my 20-pound bound copy of 4155.1 (the FHA bible) to beat off the barbarians. It is so often code for getting rid of these persnicketty old rules, like the property repair requirements, that will just result in more FTHBs without reserves defaulting when the freaking porch falls off two weeks after closing.
it's friday mornin, sweetheaeaaart
Go back to bed, little one.
Tanta,
Ever since hearing about these "innovations" I have wondered how they became available in the first place. I bought a house on an extremely limited income in 1989, and I remember quite vividly how thoroughly our finances were checked; especially the sources of our downpayment. I was under the impression that even a gift from family was suspect as it might be a (disallowed, I was led to believe) hidden loan. Can you pinpoint when this became acceptable and why? Or was it always lurking on the fringes of financing options, and simply became more "respectable"?
Funny that you mention about the repairs; one sticking point became who would replace a cracked window in an attic dormer (on an 80 yr old house with far more pressing concerns, in our opinion). But I believe this was an FHA regulation and we had to address it before the deal went through.
Ahhhhhh. Once again, you have slaked my nerdthirst.
thanks, Tanta. u rawk.
Tanta - you are the wind beneath our understanding. Thanks.
Have you seen Jubak's column this a.m. ? Very interesting.
Make builders, lenders fix the housing mess - MSN Money
Make builders, lenders fix the housing mess
The housing industry showed incredible creativity when it came to qualifying people for mortgages they couldn't afford. Let's make its leaders put their thinking caps on again and fix the problem.
Makes sense to me. What do you think ?
You've waxed very eloquent on all the breakage where interest in pumping deals 'cause folks make their money from that rather than making "good" loans drives them to idiocies.
How would you fix this ? In broad terms - that is what strategic principles can we all push on our legislators before something really stupid is put in place ?
The problem that I have with "zero down" is macro-economic, not moral. The down payment is, in effect, a governor on the expansion of credit like reserves in the banking system. With essentially unregulated securitization, zero down programs have helped to accelerate the expansion of credit to a unhealthy and, it is turning out, unsustainable degree.
ratefink, these seller-funded DAPs really became a noticeable source of FHA loans in around 1997. The first time HUD tried to ban them was in 1999-2000. By then they were fighting off the "compassionate conservatives." The HUD IG's office has been issuing steadily more upset reports about these practices since then. But the lobby has been winning.
The real change in momentum came when the IRS finally declared them a scam and challenged their "nonprofit" status. Even after that, though, there's a huge lobby supporting them.
You're absolutely correct that in traditional FHA underwriting, even gifts from family members are "sourced" and documented. FHA isn't naive; it has always known that abuse can lurk whenever funds are gifted.
And yes, FHA has this reputation for involving time-consuming and apparently "trivial" things like forcing the repair of a broken attic window before a loan can close. But, well, it involves government insurance of very high LTV loans. Back when FHA was the only game in town, sellers quit whining and fixed the freakin' window.
Ya think conventional subprime lenders ever worry about such things? Nope. So now we've got people wanting FHA to follow dumb lenders down, rather than using the implosion of the subprime lenders to reassert basic principles of low income high LTV lending.
Those principles will always end up generating a few requirements that can seem silly or nitpicky. BFD, as far as I'm concerned. It's the price you pay, and we used to not consider waiting another few weeks to close to be a big price to pay.
Go Tanta.
I particularly like this phrase:
It is, precisely, the kind of sleazy, conflict-ridden, self-serving "initiative...." that thrives in an environment where regulation is dismantled or unenforced and "government" is bashed with one hand and milked with the other.
Juxtaposes nicely with "The loss side has hit us much harder and more quickly than we could ever have anticipated."
Thanks.
Would it be all right to print this article, attributed to you, and send a copy to my legislators with my comments? This is a scam, pure and simple.
Yikes down down 161 on open....interesting day..looks like a roller coaster day for sure...The Investors (HAHA! There are some) against the PPT.
Makes sense to me. What do you think ?
Well, I confess that the mental image of the Tanned One being made to stay after school to clean up the mess sent hot coffee dangerously close to my nasal passages.
I have been arguing all along for making the perps clean the mess up. That's why I favor workouts: make them rewrite those loans the way they should have written them in the first place. If it means that mortgage lending becomes merely profitable, as opposed to obscenely profitable, well, I used up my tissues laughing over it, so don't expect me to cry.
Same with an idle proposal I made a while ago to make the rating agencies shoulder some cleanup responsibilities.
Frankly, though, we aren't going to get anywhere until we really give up on the "homeownership is always and everywhere a good thing for people" article of faith. As long as that one still has legs, then anything that "puts poor workin' folks" into loans is automatically good, and anything that might increase the cost of credit is automatically bad. And so any proposal to wring the bailout costs out of the industry gets waylaid by the claim that it will raise the cost of homeownership, as if it's the cost of credit, not the cost of homes, that is the issue.
Would it be all right to print this article, attributed to you, and send a copy to my legislators with my comments?
Certainly. You can even invite the little buggers to come read a blog and, hey! leave a comment defending their position. It'd be, like, interacting with constituents or something instead of just lobbyists.
visitor count low
nothing to see here folks
I sold a home last year and the buyer did one of these. When I signed the sales contract it stated the buyer was pre-approved for a conventional mortgage. I thought "great, they have their down payment and this should be easy" so we signed the deal. At closing I was handed my sales contract with some changes for me to sign. Instead of a conventional mortgage the buyer opted for some "seller assistance" program that I was never made aware of. Their broker increased the contract sale price by $5000 and was able to get an appraiser to do a "drive by" appraisal. The $400 fee that I was supposed to pay was somehow buried on he buyers side of the HUD-1 because I refused to pay it (since I didn't hear about it until the day before closing). The sale was recored at the county with an inflated sales price which everyone on the block used as a comp. These buyers apparently didn't have two dimes to rub together for a down payment but were able to buy that house with "seller assistance" that I had no knowledge of until the day before closing. If I thought my property was worth an extra $5000 I would have listed it as such. This one deal had a direct impact on the future sale price of least five sales. In the end I got what I wanted out of the sale so it didn't make much difference to me, but I couldn't believe the buyers were able to pull this off on those terms which had a direct impact on property values nearby.
Its been driving me crazy all morning, but I was trying to recall a quote that I think I read here in the comment pages.
Something about how its a rare investor that has the foresight to invest correctly and the determination to see it through.
Does anyone remember the quote?
Why can't we get the Federal Reserve
to manage the social Security Money and be done with it. The Fed can
print money and enhance the returns.
This whole idea of coercing people
to save for retirement through
homeownership is not working, is it?
Kind of on topic, no Tanta?
Buy the Dip now?
Now?
help... !!!
Now?
For fun
curb rules
NYSE, New York Stock Exchange > About Us > News & Events > Media Resources > Media Resources
The insidious element in this is the one Tanta mentions in her 10:44 AM comment -- that "homeownership is always and everywhere a good thing for people".
Tragically, it seems that the ideology of most economists requires them to view inflation in asset prices as different from inflation in goods and services, because they supposedly "can't know what the proper price of assets should be" (to paraphrase Greenspan and others). I had a go-round on this with David Altig (macroblog, U of C, now at the Atlanta Fed ) many months ago; wish I had saved the URL of the comment thread.
Of course, the reason why so many people think not only that home ownership is always and everywhere a good thing, but also that entering into a highly leveraged speculation in housing futures with a home as collateral for the margin loan -- essentially what much "home ownership" has come to amount to -- is always and everywhere a good thing is that loose money and ludicrously favorable tax laws have sent asset prices into the stratosphere.
The question is now: How much longer can the Fed keep money loose enough to keep asset prices in the stratosphere?
Uberthirst?
How about Uberlust?
Reading Tanta does not quench my thirst for more info - it raises my thirst to lust levels.
Yes you rock Tanta.
Alas, in my situation lust is only a misty memory. Too old and too paid off to have any of this knowledge payoff.
Ha Ha
Thanks Tanta - I first came across this when Barrons did an expose of it - hmmmm - 2 years ago - and was shocked.
This information is really useful - the worksheets are really helpful - not for beating "liberals", "do-gooders" over the head with it but to ensure that those who do voluntary, unpaid work in the general advice field are aware of the nefarious enabling organizations that are around and can counter their efforts with real data.
-K
Somehow we need to get through to the public at large, and the legislators, that enabling someone to "buy" a home with no down payment does not make them a "homeowner". Rather, it makes them a real estate speculator operating with infinite leverage, while whoever lent them the money holds title to the home.
Somehow we have to keep this simple.
Maybe the way to do it is to keep hammering on the fact that the real owner is whoever holds the title, and keep pointing out that that ain't the "buyer".
I think that WE all agree that in general, somebody who can't manage to save up 3% isn't really ready to buy a home. It's really only the abnormal appreciation of the past few years that made this LOOK like a good idea.
Perhaps I am just a weird case but I guess I just assumed most people who took 0 down loans were like me (yeah yeah, I know what happens when you assume).
I took out a 0 down loan because at the time I really did not have enough money to both pay the closing costs and make a down payment. I budgeted so that I could afford the payment on both mortgage loans while still being able to save up over time to pay off the "20% down" loan faster over time.
Perhaps it really would have been better to rent for a few years longer from an economic point of view, but it really does feel good to have a house that is "yours" and that you are fully responsible for.
Thanks Tanta -
It's simple, clear, and concise.
But I'm afraid that disqualifies it as an UberNerd post...
10 yrs ago I got basically the same loan as the example ($102K purchase price)...thru Countrywide (& they were awful...quelle suprise). The real world was a bit different...The closing costs amounted to more than $10K - and that was after my going over each 'garbage fee' and eliminating a lot of them....So really, the "3%" is a bit of a misnomer..It was more like 12-13% but only $3K went to my home purchase....$15K was a lot for a little guy first homebuyer to cough up.....
"its a rare investor that has the foresight to invest correctly and the determination to see it through."
Made me think of a recent Financial Times article:
"Vanguard , one of the worlds biggest fund managers, says it was caught off-guard by the impact of the turmoil in the credit markets on its $25bn in quantitative investments, and believes such strategies will be more volatile than it first thought. [...] Vanguard is best known as a pioneer of index funds, but more than half its money is now actively managed."
Et tu, Vanguard?
FT.com / UK - Vanguard’s ‘quants’ caught off-guard
Tanta,
I am interested in this because I have a somewhat marginal buyer leasing a house that I hope to sell them in a year or three. The "lease to own" provision is a note on the lease that $100/month of their rent will apply to the purchase of the house should they buy it. The rent is comparable to similar houses in the area, so they are not overpaying on rent. My hope is that the $100/month can apply to their down payment. Is this a forlorn hope?
Thanks
Robert,
I'm afraid it is. You said the rent is comparable to rents around you. That's the problem. Everyone pays to live somewhere, except for my lazy brother, but that's another story. So if your tenants are paying you fair market rent, then I'm not going to be able to count that $100 monthly, because it's not "on top of" the fair market rent for the property.
Thanks