20% down. Really?

I guess it’s a sign of the times we live in. I was attending my brother-in-laws ordination (or Pastorization, as he prefers to refer to it) and I was asked what I do for a living. When I told him I was in the mortgage business he told me he would pray for me. That may have been for past sins, but more likely because of the condition of the industry.

There are still people getting loans, but it certainly is not like the good old days. B of A, Wells & Co have announced layoffs in the thousands. This is on top of the massive fallout of the last few years, and the orchestrated effort to diminish competition from mortgage brokers. If you are still in the business chances are you are a glutton for punishment and/or very good at what you do. In all fairness, the federal government is both at the heart of any remaining lending, and practices choking the real estate and mortgage industry to near death.

The fact is housing affordability is at its highest level in about 40 years. That spans three or four recessions. Investors make up a larger portion of home purchases than is typical, even though financing restrictions severely limit their options and a large down is required to purchase. Take a look around your area and compare what it costs to own verses what it costs to rent. In the higher demand areas the spread is hundreds, if not thousands of dollars in a “normal” market, whatever that is. If the difference is smaller than normal it is a good indication that property values are either in line or somewhat below their potential. In some areas it is actually less expensive to own a home with a small down payment than it would be to rent the same home. This is definitely and indication that the selling price of homes is at or below a sustainable level.

When the shoe is on the other foot, remember that it shouldn’t cost twice as much to buy as it does to rent. That is a sign that housing prices are above a sustainable level. A word to the wise…

There is a rule being proposed that would mandate a 20% down payment if the borrower has certain derogatory items on their credit. Certainly there are times when this is and should be the case, but a giant blanket rule coming from “The Top” is not the answer. Underwriters (the people who approve or disapprove loans) need and deserve more discretion, not less. As I have said many times, common sense should be the norm. These sorts of things should be determined on individual merits. Rules already in place prevent someone with a foreclosure, bankruptcy or short-sale on their credit record from obtaining financing within specified time frames. That makes sense. To extend a blanket rule without considering individual circumstances is a bad idea. We need to exclude those individuals that are bad risk historically, but not eliminate buyers from the purchase market unnecessarily. All of those people who are out of work, had a bad year or two in their business, or have damaged their credit with a BK, foreclosure, short sale, or are simply missed payments are already eliminated as purchasers. That’s quite a few right there. Some of these are responsible individuals with the capability of making a house payment and the desire to own a home.

We need more common sense lending. More mandates that require the disqualification of a borrower without considering the whole picture is not common sense. LL

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