Maybe not, but they sure had a hand in the process. And, so the debate begins (3% Down). Are low down payment loans good or bad for the consumer, the economy, the housing market and the lending community?
In some cases it depends on where you stand. Like an umpire in baseball making a call, positioning has a lot to do with how you see the play. Anyone who watches baseball and sees the instant replays knows all too well it is not always as clear at it might seem at first look. Like baseball we need to do what needs to be done to at least make an honest attempt to get it right.
No doubt that 3% down loans will bring many more new buyers into the market. New buyers are good for everyone, as long as they are qualified buyers. Here’s where it gets a little hairy. Coupling lower down payment loans with the easing of credit standards could have an adverse effect.
FHA is a low down payment program. Due to increased losses they had to increase the up front and annual premiums. Although FHA is now reporting an improvement in its reserves, they are still not close to where they want it to be. The improvement is due to the higher credit standards imposed under Dodd-Frank.
Like it or not the effects of the new rules are not all bad. Yes, they limit some access to financing but they also ensure that those buying have the capacity to repay the debt. That’s good for everyone.
Reducing the down payment in and of itself may not cause problems but it could contribute. Some homebuyers now being held back by the current requirements may be prompted to make the move to buy although not quite ready. The reduction in down payment may make home buying more accessible but it doesn’t make it more affordable. Unfortunately having less invested in the deal does makes it a little easier to walk away if and when things get tough.
This is not to say that a lower down payment loan program may not be good for everyone involved. However it is to say that hopefully we’ve learned from history. Not everyone should own a home. This is huge commitment and responsibility, and one that cannot be taken lightly.
It is a good thing to increase potential pool of home buyers but whatever is done to do so must be done responsibly. To put someone in a home they ultimately cannot afford does no one any good, especially the home buyer.
Think about it for a minute, the first time homebuyer by their very nature has limited knowledge and experience in homeownership. This is a huge commitment and expense. They usually buy at the lower end of the housing market, being the oldest of the housing stock. Their need to access a loan with minimal down payment would leave one to believe they also have limited reserves. So unless they have a very good income and a strong discipline, if anything goes wrong, i.e. new roof, major car repairs or medical bills, they will have a rough time meeting the mortgage obligation. Once they fall behind, things snowball…well you get the picture (and it’s not pretty).
Let’s make sure we go into this low down payment thing with eyes and minds wide open. It’s admirable to want to do things to help those in need, but let’s be sure the intentions are noble; that we’re doing things for all the right reasons. Not to just increase business so some people make more money while others suffer. Unfortunately we’ve been there before…