Real Estate Investing

Former Secretary of the Treasury Paul O’Neill has said Congress should drop it’s latest economic stimulus package in favor of changing mortgage rules to the point that no loan is given without a 20 percent down payment.  According to MSNBC O’Neill said,

In 2006, he says, 30 percent of mortgages had no down payment and a larger number of those buyers defaulted on their first payment.

“That was a strong enough signal we should have shut down this … flagrant abuse of the principles of home finance,” O’Neill said. “It was bound to crater. It was absolutely bound to come down around our ears, which it has.”

If every mortgage was backed by a 20 percent down payment, O’Neill said, the financial system would be protected long-term, even if some individual investments or businesses failed.

This would definitely protect the U.S. financial system in the long run because NO ONE would be able to get a mortgage to buy a house.  If there are no home loans made, there is nothing to lose.  My first house in 1992 cost $88,500.  Although $7,000 doesn’t sound like a lot (5 percent down payment plus 3 percent for closing costs), our gross income as two working parents was about $33,000 per year at the time.  That made finding $7,000 hard to come up with.   

But we had scrimped and saved for six years and finally managed to do it.  However, if it was $17,700 we would’ve had to pay - along with $2655 for closing costs - it would’ve taken 15 years to get into a home.   My point is, there is nothing wrong with asking people to put money down when buying a house, but I believe 5 percent is more reasonable.

My husband and I have never missed a house payment, we’ve never been late on a house payment.  Therefore not every person who puts no money (or as little as 5 percent) down is in default - ready for foreclosure.

However, on the flip side, the benefits of coming up with a big downpayment are tremendous.  Mike Adams of Somerset 08873 writes,

The risk of putting down too little: If the home falls in value and you sell at a loss, you’ll owe more to the lender than you receive from the buyer. In addition, many mortgages require buyers who put down less than 20 percent to get private mortgage insurance, which can add $80 to $100 to your monthly bill. And the less you put down, the higher your loan balance and therefore your monthly payment will be.

I think there should be a happy medium.  I agree that Zero Down programs should accept a large part of the blame for the level of foreclosures we have today.  However, if I had to wait 15 years to buy a house, I would’ve gone bonkers.  The solid compromise, in my opinion, is to go back to the 5 to 10 percent down payment level.

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Photo from Lifestyle Options 55.

I met with a new buyer yesterday who lenders today would be drooling to gain as a client.  He is highly qualified to buy with no real debt, excellent credit, and a great job.  He has already spoken to a very big, very well-known bank about getting a mortgage and what they told him absolutely shocked me from my head to my toes.   But let’s back up …

Recall how this current housing crisis has been caused because banks and lenders pushed people into more house than they could afford.  The people who bought are just as much to blame because they didn’t make sensible decisions but rode the wave of elation that they could buy a much bigger house than they first thought!  Now our economy is in the tank because there have been an insane amount of defaults on mortgages.  Banks / lenders sold these bad mortgages to the big boys on Wall Street who bought them in bundles.  Now there isn’t enough capital to cover the investments and homes across America continue to empty out, all the while neighbors watch houses deteriorate and weeds take over once beautiful yards.

And the Washington politicians feud, grandstanding and arguing during this pivotal election year, an election whose results will quite possibly determine the future economic success or failure of our great nation.

And it all trickles back to my buyer.  He’s sensible.  He’s ready and qualified to buy.  He and other people like him are the key to recovery.  Again, he spoke to the lending department of a major bank this week.  They told him he was qualified to spend up to FIFTY PERCENT OF HIS CURRENT INCOME on a monthly house payment.  Whoa, Nelly.  Come again?  Yes… they told him - even given today’s financial crisis that’s threatening to bring our nation to its knees (and brought the Secretary of the Treasury yesterday to his knee) - that he could spend 50% of his current income on a house payment each month.  Fifty percent.

I find this unbelievable and appalling that people are still being guided to make ridiculous decisions like this when the general rule of thumb is people should spend 25 to 33 percent of their income on a home.  What if my buyer decides to buy a car?  Or gets a credit card?  Or has a medical emergency?  At 50 percent, he would be unlikely to save money toward any type of future emergency.  Even as I rant, though, millions of people do spend half their incomes on mortgages.  The Truth About Mortgages (dot com) reports that according to a 2007 Census Bureau report, over 7.5 million homeowners do just that,

Last year, 38 percent of homeowners with mortgages spent 30 percent or more of their income on housing costs, the limit the government considers affordable.

And more than 7.5 million people, or roughly 15 percent of American homeowners with a mortgage, spent half of their income or more just to pay the mortgage each month.

One blogger says the roots of this current crisis go deep.  The root cause is the basic financial mindset of American society,

We have a collective psyche that refuses to accept that there are limits on what one person can or should acquire, refuses to delay gratification, constantly pushes for more, bigger, faster, shinier things. Our entire economy is predicated on the endless acquisition of material goods. That, and deep-seated insecurity about our own positions in the world.

I’ve heard for years that this consumer market doesn’t put enough money into savings.  Maybe this scare will spur people to take a long, hard look at their spending habits so they can finally see that savings accounts are perhaps better than that new 52″ flat screen television. 

Meanwhile, my buyer was just as incredulous as me when he heard the “50 percent” price.   I asked him to work on a monthly budget plan so he can realistically determine an amount he’s more comfortable with.  He has to do this because obviously some lenders are still pushing buyers into more than they can afford.  Together, we’re looking at home prices that reflect 25 to 30 percent of his income.

Poopsie Pup picture from here.

Possibly due to the housing relief bill signed into law in Washington, D.C. last week, the phones in real estate offices have begun to ring again.  This will probably be an artificial jump in housing sales, but for now every little bit helps.  One component of the bill will eliminate the down payment assistance programs currently at the disposal of buyers who need help getting into a new home.  According to the Ellis Team of RE/Max,

Buyers who wish to buy with no money down had better hurry, because the new Housing Bill signed recently essentially eliminates down payment assistance from the seller on all FHA loans, and Congress added in the bill a provision that the new minimum down payment  will now be 3.5%, up from the previous 3%.  Financing is getting increasingly harder to get, and underwriting guidelines are changing daily.

As a result, buyers I’ve been working with for some time have found a renewed urgency and are kicking their home search into a higher gear in order to buy prior to October 1, 2008 - when the programs are expected to end.

However, the FHA Loan Advice site doesn’t believe the programs are down for the count,

For both political and practical reasons, many in Congress agree that down payment assistance programs should be continued. Although the portion of the new law banning down payment assistance has not yet taken effect, HR6694, the “FHA Seller-Financed Downpayment Reform and Risk-Based Pricing Authorization Act of 2008” was introduced on July 31. All the non-profit organizations which have been facilitating the program are already out beating the bushes to round up support. If you would like to help, the Nehemiah Corporation has a website set up to help you find out how. You can find it by clicking here.

I’m hoping the members of Congress who are supporting legislation to continue the programs will be successful.

Meanwhile, I found an extraordinary site called Calculated Risk that is being added to my list of *must-reads* if you like reading about investing, finances, and other economic information.

Photo was found here.