$500 moves you in: The new no-money-down mortgages

Good morning. There's an excellent piece of enterprise reporting in this morning's Wall Street Journal about the new wave of no-money-down mortgages built on government-backed loans.

The Journal's Nick Timiraos: "The offers -- including "100% financing" -- are made possible due to down-payment assistance programs run by nonprofit organizations. These programs are funded largely by home builders and also by private homeowners desperate to sell. The seller-funded groups provide enough down-payment money to buyers that they can qualify for a mortgage backed by the Federal Housing Administration, which requires at least a 3% down payment."

More: "D.R. Horton Inc., the nation's largest home builder by volume, is touting '100% financing' for its two- and three-bedroom condominiums near the beach in Maui, Hawaii, which start at $498,000. In the Seattle area, local builder Quadrant Corp. is advertising townhouses that can be purchased with as little as $500 down. 'Use your coffee budget to move into a new home,' says an online promotion."

The FHA says borrowers who receive a down payment from a nonprofit group are two or three times more likely to default, the Journal reports. It estimates that such borrowers now make up 34% of all FHA loans -- up from 2% in 2000.

Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com.

Comments

[el guapo]

Irresponsible in my opinion. But FHA loans do at least verify incomes, right? Have an income to debt ratio that isn't completely insane, no? 30 year fixed, eh?

[Rich]

When I locked in my interest on an FHA in November '07 and then completed the application in January '08 (from Bank of America with Chase as the broker) I was told my down payment would have to come from my own resources, and they combed through my submitted bank statements carefully and questioned a couple of transactions in order to make sure it was. So, was Chase being rigorous beyond the rules? Was I not allowed the same latitude as others because they were trying to tighten up their procedures? And did they really succeed in improving the salability or value of my loan to the securitization market if it turns out that other FHA's are not being written to high standards?

[IToldu2CashOut]

This is where the government needs to step in and regulate mortgages like they should have been doing all along. Instead they want to bail everyone out and keep the system going so it can fail again. Smart. I guess no ones learned anything.

[Nelcisco]

Ameridream And Nehemiah are a couple of nonprofit assistance programs.

FHA has pretty tight standards, much better than subprime, you can't go stated so that'll elimiates the
lie right there.

If FHA can keep standards true meaning 2 yrs w-2's,
proof if income (paystubs), seasoning on borrowers $ in the bank, DTI 31.48%,defaults will be a non-issue

[you get an FHA!]

Many would tout these types of programs as new way to "housing affordability" in this market...commenters on this blog have implicitly done so on a number of occassion.

Doesn't sound sustainable to me...

[Gromit]

In the medium and longer term, I hope consumers will instinctively understand that buying a house should be done conservatively, with a sizeable (20% ish, anyone?) down payment and foreseeable income to pay the debt service, taxes and upkeep, with a reserve left over in case of unexpected expenses.

Point being: I hope these sorts of "OMG NO MONEY DOWN, COFFEE MONEY" offers are just a temporary bloodletting, a last purge before we return to the approach I outline above. I can dream, can't I?

[RZ]

When people aren't required to put down an amount that they feel is of value, whether it's 5% or 20%, they have less incentive to keep paying and hold onto the house when things get tough. It's a whole lot easier to walk away when you view your mortgage payment as rent with a tax break rather than a way to hold on to an asset in which you have already invested a sizable sum of money. All these programs are going to do is perpetuate the current state of the housing crisis. But as someone who is waiting to buy a foreclosed property, I'm not going to complain too much.

[Nick]

Mortgages are highly government regulated already; that should tell you how effective government regulation is. At this point, anyone calling for more government regulation is just proposing wasting more money, which puts you in the bailouts camp as far as I'm concerned. The market needs personal accountability and liability, not more worthless and ineffectual "oversight".

I'm sure the FHA loans have some requirements, which is probably being creatively bypassed in many situations by DAP programs and other fraud. Even if they aren't, it's not like your 3% down is gonna keep you in the house when it's 30% underwater. Stupid, stupid, stupid backdoor bailout program to offload losses to taxpayers. I can't express enough how much it pisses me off to see my government giving MY MONEY to speculators, fraudsters, cheats, liars, and gambling banks.

[Laker]

FHA loans by definition are good thing but they need to be limited to low income, and sure not for inflated amounts like $729,000. While it is true that those that buy with 3% down (that sometimes is kicked back by seller) will make those default in case there is any problem in paying the mortgage or if the house gets 20% underwater. You need to put some skin in the game. That alone, will guarantee a steady nice supply of new foreclosures to come, courtesy of US Tax payers.
The good thing is that FHA is full doc, and debt to income ratios are enforced. I don't think there are that many people in LA that will qualify for $729,000 FHA loans to buy all the foreclosed house in LA.
As some mentioned here, there was never a problem when true qualified buyers bought houses with qualified loans. Problems started when unqualified people got crazy loans - that was not sustainable, and we can see that today.
The best thing for our health of the economy would be to get back to 20% down payment as a standard, untill then, no recovery.

[RO]

No money down home in Maui?! Sign me up!!

[Housing Bull Chorus]

WTF!

No 120% LTV loans?

Those mean stingy bankers.

So much for helping people in their Million Dollar homes!

But then again...shouldn't we bail out those people also?

Why do poor people get all the luck?

Wealthy HELOC abusers UNITE! SUV & BMW bailouts for all!

[shockg]

So much for the speculators argument that all lenders require 20% down and no one has 20% lying around...blah blah blah....we hear it everyday here.