Down payment guidelines must change.
I don’t play ice hockey goalie anymore. Why? I’m way too slow for the new punks playing the game.
Some of the mortgage underwriting guidelines are way too slow for the new buyers.
If you have read my posts before, you know I am critical of the overcharging in both the real estate and mortgage industries by quote, unquote, professionals. And now, the new generation of buyers are not happy to deal with the underwriting guides from when I started in the business (1980 something) and years before that.
Let me give you the biggest example of the problem and the solution when it comes to the number one barrier- DOWN PAYMENT.
$500,000 sale price
Minimum down payment for a 97% Conventional loan is $15,000.
Borrower with great jobs and a 740 score.
What you have are people that need help with the down payment because everything else has gotten more expensive (I do not believe in the way government inflation is calculated).
Every Fannie Mae, Freddie Mac, FHA, VA, JUMBO and USDA guideline about this tells you specifically that they can only get the money by having it or getting it as a gift from a family member basically. They say that the seller, the realtor or their best friend cannot contribute to the down payment, only closing costs.
Since these rules were written, a lot has changed.
Value- The lender is only worried about the home’s value at the time they give the loan. Deviations of even $1, cause loans to go into a different pricing category or additions of monthly mortgage insurance. Do they not understand that the day after the loan closes and every day after, the value of the property changes? Of course there will be defaults. Stuff happens, but it is not because the value changes. It is because someone does not have the income to pay it or the value drops so much that abandoning the property is the only way out. That does not change based on where the initial down payment came from.
Which leads us to the old adage of “skin in the game.” Lenders will bloviate that if someone has some money in, they are less likely to default. This is now officially the worst argument. Why? Because Fannie, Freddie, FHA and VA allow 100% gifts. Yes, you can buy a home with NONE OF YOUR OWN MONEY. This argument is now officially over.
Moving on…APPRAISALS. The bible of value. These 7000 page documents get scrutinized to death but the fact is that you are giving people a 30 year mortgage. Why are you so fascinated on one day’s value? That’s right, the value on the day the appraisal was done is the only thing they care about. Values change through no fault of the new owner.
Fraud on Appraisals- Pre-08/09 crash times, any loan originator could order an appraisal from any appraiser as long as they were on a lenders approved list. The lenders did a minor job of vetting and the fraud was out there. Now, when someone orders an appraisal, it is done blindly so you do not know who is g0ing to show up. Generically, a good thing. Fraud is now way down as it should be.
Real estate broker commissions- Yes, there are still agents that charge 4,5,6 percent of the sale price to a seller. And half the commission usually goes to the buyer agent. In the example of the $500K sale price, the selling agent would get $15,000 if the seller offered 2.5%. What if the selling agent decided to give $5000 of that commission to the buyer to help with the down payment (assuming the seller or lender is paying closing costs already). Now, there are not allowed to. Why? 30–40 years ago, rules were written to protect the transaction. They assume that if this happened, it would cause appraisal inflation fraud or some other awful acts.
Friends and Crowdsourcing- There is a provision in the guidelines that allow for pooling of money in (usually) religious communities that a commonwealth of funds is gathered from multiple people to allow one of their own to use the money to purchase a house. This policy needs to be broadened to let anyone have a pool of money from anyone else to help. Why does it matter where it came from?
My point is, we have to re-look at this. Appraisals for the long run should not matter, the fraud has been severely reduced, the buyers are still going to make their payments and I am sure there are back door mechanisms that are out there where people are doing this illegally. Just like marijuana, get the bad guys out of the business and allow more buyers in!
The bottom line is that this will produce more home buyers and values will go up and stay up because demand will now go to the next plateau.
I am changing the narrative in housing. Commissions need to come down, municipalities need to open their eyes and mortgages need more common sense underwriting.