I assume the housing bubble Senate hearings in 2008 will cover this, but remember the day when you didn't put down 20% on a house you had to take out private mortgage insurance? Or when you had 20% "equity", you could cancel it? This was put in place to protect the bank in case you couldn't make the loan.
Then the free-flowing credit bubblemeisters figured out, well, instead of PUTTING 20% down, you could take out another "piggyback" loan to pay that silly little 20%, thus put 0% down. Or that during the bubble, these "paper gains" would prove you had 20%+ in "equity", so cancel it. Thus no PMI. Thus NO PROTECTION for the bank anymore.
But who cares - since there is no bank anymore - it's Freddie, Fannie and China holding the risk (and about to feel the pain).
Anyone else see a problem (or many, many problems) with this?
Ten years ago it was almost unheard of for a mortgage lender in Midland to offer financing for a home without a down payment, but according to experts the number of first-time homeowners purchasing their houses without any money down has increased substantially in recent years.
Competition in the housing market has contributed to the trend, McKenzie said, by encouraging lenders to relax their lending policies. Low-interest rates have fueled interest in home ownership, McKenzie said, and increased the number of mortgage brokers and lenders involved in financing the purchase of a home.
"Everyone is trying to get into that business, so it's become more competitive," McKenzie said.
Taylor said buyers who choose to put less than 20 percent of the value of a home into a down payment usually have to pay for private mortgage insurance, which protects lenders against default. Typically, once a homeowner has accrued 20 percent equity they are no longer required to make these payments -- which currently are set at around 0.87 percent of the principal -- but according to Taylor many buyers are purchasing homes without a down payment or the need for PMI.
By taking out an 80-20 loan, or "piggyback loan," buyers receive a mortgage for the first 80 percent of the home's cost and a second mortgage for the remainder. This allows them to avoid the need for PMI and still provides homeowners with a relatively low-cost blended interest rate, usually around 7.5 percent, Taylor said.
June 04, 2006
No down payment. No private mortgage insurance. This is going to end so badly
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25 comments:
When you are right you are right.
short the lenders
I've seen this mentioned several times here, and yes, some banks are gonna lose some money. But it isn't going to matter to Freddie one bit because they don't do seconds. They are in first position and they still have their 20% "down payment" no matter where it comes from.
The bank that fronted the second is charging 8%+ and presumably is making enough off of the folks that are paying their bills to absorb the additional defaults. Plus all the really bad paper has been pawned off on investors - the same people that are going to get killed from a lot of the houses that won't sell.
The homeowners are going to get killed, but I don't think the banks are in that much trouble.
Not that big of a deal since the mortgage company gets paid first in the event of a default, then the second trust. The net effect to the primary lender is the same - they still have their 20% equity (if the home still has 80% of the value, that is) Correct me if I am wrong...
Who cares how it ends. Big business and the political machine has made money on every transaction. The icinfg on the cake is that good or bad, we are all controlled by the government.
We are all controlled by the Fed Bank.
Including the Gov.
duh.
The idea that the banks are still protected if they have the first 80% doesn't work if the value has been inflated.
That's exactly what happens when people who couldn't get mortgages before, now can get these toxic loans and compete against people with conservative traditional financing.
So the price goes up---appraisers dutifully follow along with the "comps" and the banks imagine they are protected with the "appraised value".
They forget the collective effect.
What do you think would happen here in the US if we did what China is now doing...mandatory 20% down payment and must be owner-occupied for at least 5 years. China wants to end the speculative housing bubble there because they know it is a bad thing and they can be draconian about ending it. We here in the US have to endure this bad thing and let it play out to its worst end. Think about it.
...and all the while we have to endure the re purmabulls making excuses for why "it's different this time".
say goodbye to the stock and bonds markets as well as the housing markets
Marinite- China's new DP requirement is 30% - it used to be 20%.
What do I think would happen if we had the same requirements?
I think housing would get a whole heck of a lot cheaper. Buyers would be resoponsible . And we wouldn't be in the mess we are now.
What I'm wondering is : How does China feel about our mess? Don't they have a stake in what happens? If we keep up with the lax lending, won't China lose some bucks in the end?
Answers anyone?
With all of these ARM's coming due for readjustments, and with foreclosures already soaring nationally, it seems to me in the interest of self-preservation that lenders would begin to approach this huge segment of the "homeowner" market and offer to switch to fixed rates for minimal fees. That's seems a better solution that watching millions default as housing values slide beneath loan amounts that can never be repaid at higher rates.
People who but with ZERO down , pre-insane run up 2003, will be fine. I bought my home in 2003 with no down and no PMI (it was included but in form of a point higher interest rate)and with no PPP. I refinanced in 2004 for a lower rate with no PMI and no pre payment penalty. Even of the market drops 50% I will still be ok.
Those who bought 2005 and later will be stuck with either 0 or negative equity. But hey, don't forget the 125% loan; just saw a billboard with a 125% loan ad.
Amd those who bought pre 2005 and want out of an ARM can refi into a 50yr fixed and still keep the payment relatively low.
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