Posted on 06/10/2011 7:24:42 AM PDT by Kaslin
And you thought things couldn't get worse on the housing front. The U.S. housing market is in the worst shape since the Great Depression, and now the Obama administration's solution is to impose new rules that would banish 60 percent of current homebuyers from the market.
The proposed Mortgage Qualification Rules are the result of legislation passed in the wake of the financial meltdown to ensure that mortgage-backed securities are based on high-quality loans. But the effect will be to disqualify millions of potential homebuyers.
Earlier this year, the six federal agencies tasked with drafting the rules added a requirement that homebuyers make a 20 percent down payment to qualify for low-interest mortgages. In addition, the new proposals announced this week would cap the amount of income that borrowers could devote to mortgage payments to no more than 28 percent of gross income. Worse, it would disqualify any borrower whose combined debt payments amounted to more than 36 percent of monthly gross income.
What does this mean in practical terms? In 2009 (the last year for which we have accurate data), median household income was just under $50,000. Under the proposed new mortgage rules, an average family would be ineligible for a low-interest mortgage if they owed more than $1,500 a month in payments for all their financed debt: mortgage, cars, credit cards, student loans, and anything else bought over time. And the mortgage payment alone could not be higher than $1,166, including escrow for taxes and insurance.
The proposed rules would put an end to the American Dream for much of the middle class. As Urban League president Marc Morial said, "Homeownership, as we know it, could be a thing of the past" if the proposed rules take effect.
But the damage extends beyond depriving individuals of the opportunity to buy a home -- it will ripple throughout the economy. There is no question that the depression in the housing market is costing jobs, and not just the obvious ones in construction. Part of what has made the American economy more resilient than other countries' over the years is the willingness of Americans to pick up and move when jobs in one area disappeared but were available in other places. But the inability of many people to sell homes has reduced American geographic mobility to historic lows.
The consequence is to keep those people who have lost their jobs, but own their homes, from moving to states where jobs are more plentiful. If they can't find a buyer because the government has made it so difficult to qualify for loans, they're better off staying put and collecting unemployment insurance.
There is no question that many Americans have become addicted to debt and live way beyond their means. But one of the best ways of determining whether or not someone can really afford his or her lifestyle is to examine credit history-not simply the level of debt. But these new rules would punish even those borrowers who have never missed a payment and have exemplary credit ratings.
It also treats income as if it is fixed over a borrower's lifetime. A relatively young college graduate may have significant debt from earning that degree, but his or her income is likely to increase substantially over the 30 years of a mortgage, and restricting access to a loan on that basis makes little sense.
And, of course, the obverse is also possible. Incomes fall as well as rise. Just because someone is earning a lot today doesn't mean he or she will be making the same amount next year or the following.
But the real problem with these rules is what they will do to the overall housing market. Without buyers, home prices will continue to plummet. There are already too many unsold houses on the market, about twice the number you'd expect in a healthy environment. And the administration's solution is to drive millions of credit-worthy buyers from being able to purchase them?
These Obama administration rules could turn what increasingly appears to be a double-dip economic recession into a full-scale depression. The president will pay politically for this disastrous policy -- but Americans will pay out of their actual pockets for his folly.
I beg to differ. The price will adjust and homes will sell at that price. It’s basic economics.
What isn’t basic economics is artificial stimulation or government regulation. Remove those, and prices will find their correct level.
Not necessarily. Wall Street, i.e. the financial community has proven time and again that it cannot police itself. There is much more to come over the MERS scandal, and it's going to cost banks much more than $20 Billion.
The only way to get us out of this mess is to ratchet down the use of leverage, and enforcing hard limits on the use of leverage by financial institutions is a legitimate function of regulators, i.e. the government.
Up until the 1990s you had to put down 10% and 10% was insured through private mortgage insurance. And the 26/36 rule was there. FHA was 29/41. VA was 41% only with no front ratio.
From 2007 to 2010 my wife and must have sold 80 houses or so. Only one buyer put down more than 3%. Not one of those buyers have gone into foreclosure yet.
What caused this mess was phony values and no doc “B” paper interest only and and adjustable loans. People bought what they could afford at the time but when the rate adjusted the houses had dropped to what they should have been valued at to begin with. Now they can’t refinance because their house doesn’t appraise. Were they stupid to have paid the over valued prices? Sure. But knocking another huge percentage of buyers from the market is not the solution.
I can see a mortgage moratorium in the future. Plus, a major bank failure is looming, too. Times are really going to get tough.
And I forgot the zero down stupidity. But there were many who did put money down but their rate went through the roof and their value went through the cellar so they couldn’t refinance. Plus there are millions who bought by the rules but are losing their homes because they lost their jobs.
People are saying on here to let this sort itself out and homes will sell when the price reaches it’s bottom. Sadly I’m afraid many of them will be crack houses by then. And those will never sell.
I don’t know what the answer is but I do not believe the government going to the extreme is the solution.
Those were the rules when we bought our home and never should have been repealed!
Kick the low income and those that don’t save and live on credit leaches out in the street!
Your kind of loan used to be really all Fannie did...
I’d even say 10% if you have other assets out there and over a 720 FICO.
Less than 10% is really where things get hairy...but I’ll even concede that 3% down FHA loans really didn’t have major losses until they started using it as a subprime substitute.
I think this will make a lot of people landlords and renters at the same time. We will rent out the house we have mortgaged and be renting a house that someone else has mortgaged. If a lot of people are put into this situation I can see things getting real messy real quick. One renter not paying rent for too long and a domino effect may occur.
Terry, I share your concerns, but removing truly unqualified "buyers" from the market is a big part of the solution.
If a young couple know they're going to have to put down 15-20% to qualify for a house, they'll do it, even if it means they'll have to give up their Beemers and all the other goodies that they thought they were "entitled" to.
It makes no sense whatsoever to approve a mortgage with a 25% front end ratio, when the back end ratio is over 60% due to student loans, car loans, and credit card debt.
The real problem is more on the income/assets/credit side than the down payment side. Stated income loans, etc, and just general overvaluation caused by easy money.
Should people have “skin” in the game? Absolutetly. Does it have to be a full 20%? Maybe, maybe not. Traditional FHA loans had low overall losses until recently, when they started giving them to people who really didn’t qualify, hoping they could be swept under the rug when they were packaged and sold.
But it was a kinder, gentler, more compassionate central planning.
What do you mean by a mortgage moratorium?
Wow.. This is EXACTLY the underwriting criteria routinely used prior to the 1990s. You know, back when sanity reigned? Before the build-up to disaster that was caused by the lax standards Chavez apparently wants to retain?
Starting a “new fannie” that uses late 1990s guidelines might be a good start. Let this be a more truly private organization than the GSE’s ever were (FNMA WAS private even then though).
I agree with your basic idea accept for the credit score. Credit scores only show haw good you are at using credit cards. Banks need to start looking at peoples budgets. My credit score is low, but it is because the only debt I have had in the last 3 years is a mortgage. I don’t even have a credit card.
Throw in 3 years of verifiable income, and I think we've got it licked.
A "one size fits all" approach just doesn't work, but common sense does. If I'm a mortgage lender, I would demand 25% down (or more) from attorneys, due to their sophistication and knowledge of ways to get around the system.
Attorneys have a poor reputation when it comes to paying their bills on time.
The enactment of all these rules would guarantee that in 18 months I could afford any house I wanted.
I agree on attorneys...but enforcing a different set of rules on one type of people would open the door for lawsuits...wait, that brings in more attorneys!
I take it you don’t own a home with a mortgage now?
I thought the same thing, but then thought “what do I do with the house I have that’s already $20k upside down?”
Same with me. I bought a house last year, 20% down, no other debt whatsoever, credit scores over 800, and decent sized savings accounts. Wells Fargo sold it to FNMA.
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