Not many home buyers will get 100 percent financing any more. Most will be expected to put down at least five percent. The reason: Mortgages with zero percent down, which became legal in 2004, are gone for all but the most pristine of borrowers. They were a bad idea that made only a little bit of sense during the housing bubble.
At the time, zero-down loans seemed like a necessary market function to pull in first-time buyers who were unlikely to ever be able to save up 20 percent of the purchase price of a new home starting at $200,000 or $300,000. Not many first timers had $40,000 to $60,000 sitting around, but they are hardly more likely to have it now.
Unfortunately, it is now unlikely they will receive any kind of financing without at least 5 percent to put down, and 10 percent or 20 percent will improve their odds. The reason: lenders are afraid of getting burned by buyers who have no financial stake in their purchase.
Mortgage financing has become so tight it is putting a stranglehold on borrowing. Back in the olden days -- like last year -- you would take out a mortgage from a company that then would bundle your loan up with a pack of other similar loans and sell them to another company. Today, those secondary companies aren’t buying – which basically freezes up the entire mortgage writing process.
What to do?
For one thing, the FHA is stepping up to the plate and picking up more loans, according to Mark Zandi, with Moody’s economy.com.
“We’ll see more credit available as we make our way,” he said, “but (the FHA) cannot fill this void. Until the private mortgage securities market is revived, the housing market will not flourish and will never be back to normal.”
Federal action may help, if it comes soon. Among the proposals:
· A $7,500 tax credit for first-time home buyers who purchase in the next 12 months
· Loans and grants to purchase homes in foreclosure, a bill sponsored by Rep. Barney Frank
· Make FHA money available to refinance the homes of distressed homeowners, sponsored by Sen. Chris Dodd.
· An idea to provide incentives for investors to write down loans for owners who are “underwater” on their mortgage.
Additionally, two weeks ago, the Senate approved a temporary tax credit for purchasers of foreclosed properties and set a new maximum loan amount of $550,000 for the FHA.
However, the new normal is not going to look like the old normal, analysts predict. When prices settle back into affordable land, buyers should expect to buy a place to live that also provides slow, steady equity – and not expect that they are investing in some hot stock tip with a huge, quick payoff.
Meanwhile, in the past few years, homeowners of all stripes have
become encumbered by enormous debt. As of the last week of March, Zandi said,
consumer debt in the
“If there is any disruption of income, these people are in big negative equity situations,” Zandi said. “Ten years ago, that meant a divorce, or death, and now it means they need to replace two tires or their water heater broke. It’s a very different kind of borrower on a very tenuous edge.”
Home prices have been part of the problem. In some parts of
the country, homeowners are extended way beyond their comfort zone on housing
costs, added Bernie Markstein, director of forecasting for the home-builders
association. As a percentage of median income, home prices are way too high in
NAHB conference speakers predicted slow improvement in the
“Most of the problems are localized to the formerly hot
areas of
