There are not many days over the last years that we have seen potential borrowers get turned down because we thought they were being underserved by all the product options available today. Sure there are a lot less options then there were 10 years ago, but we are more comfortable that these current options meet their needs AND keep them in the house long term.
Since 2006 we have continued to offer all the Federal and State Programs that have stayed strong through thick and thin with no money, all gift/grant, and low money down programs. Fannie and Freddie have come in and out with their offerings as well. You can also add rehab/renovation products where you have those same terms and get cash based on future value to fix up the home. Most of these programs can handle credit from 580-640 or even ratios as high as 54.9%
After a prolonged hangover from 2008, we now have the unforeseen comeback in home demand where we now have droves of buyers driving home prices past their crisis lows to unaffordable highs. Plus, we have owners who don’t want to sell due to trauma from the crisis, being priced out of any trade-up, or lack of inventory of attractive trade down options.
So into this dilemma we have a new group of lenders pushing the envelope by doing the no money down options and selling the sizzle to the brokers like an infomercial (maybe the next product will offer if you buy now you get your second one free!). It started with the Sapphire product which was a rehash of the old Nehemiah product, a national scam to create an unqualified grant product. FHA shut it down.
Now we have a Fannie/Freddie product for the 97% grant class that is either 2% or 3% gift. Each week another one comes out where they lower the FICO—started 740 now at 640---and the back end ratio was 41, now it’s to 50%. With the first products, the down payment came from premium price, but the GSEs stopped that quickly. Now the new offerings are just building it into the price of the product so you pay .5-.75 higher rate. The GSEs swear they don’t want that to happen but it is and I don’t know how they will prevent it. (Ironically most of the programs require substantial reserves that make them less attractive than existing government products.)
Is this what we really need our industry energies going to? Increasing the pool of bidders & driving the daily auction prices up. As we know max financing deals aren’t even winning many of these homes, because those with cash or no contingencies are chosen. These properties won’t appraise if a max financing bid wins an over price asking house! We are just creating discouraged pools of truly not-ready buyers. They can’t qualify for the many existing no-money down programs, or don’t have the family network to give them a 3% gift on FHA.
If they don’t have that kind of network and must “borrow” their down payment from their lender they are more likely to default because who will be there for them when the boiler goes or the roof leaks? Strong family units are behind our strongest first-time buyers and much of the minority housing growth today. They pool money to assist their close and extended family in driving AND maintaining home ownership.
We also need our attention focused on changing rules and regulations to build better communities that 55 and overs to want move to. We need to help create housing that is affordable and flexible. Old and young are looking for convenient, cozy and efficient—it’s in short supply and not affordable. By the way May Housing Starts are at 8 month low? Lack of labor? Restrictions?
We should also be pushing the agencies to be more flexible in the qualifying of the 55 and over crowd who are becoming less traditional in their incomes with varied gigs just like millennials. They are also cash rich and income poor (in GSE terms). They would sell and get a smaller mortgage on a smaller house but they are penalized for being conservative in their investments and transitioning in their careers. If we can solve for those markets we could unplug the listings jam we are in.
Bottom-line we have the tools to get first time buyers in today. Studies show time and again that potential buyers think they need 20% down to buy—maybe 10%. If we can just get the news out about the existing options for low down payment programs, we would bridge that gap and add more buyers to the pool.
So please stop this race to another valuation bubble summit and let’s solve for our real problems today—inventory and affordability. If rates and valuations continue to rise, giving borrowers a Texas Two-step down payment isn’t going to solve a thing.