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Can 3% Down Boost Lending?

can 3% down boost lending?

Where have all the homebuyers gone? In spite of gains since the housing crash of 2008, fewer mortgage applications are being approved – and the percentage of Americans who own homes has shrunk to its lowest levels in over two decades.

That’s why federal entities including mortgage giants Fannie Mae and Freddie Mac are making big changes in an effort to make homebuying more accessible. But because their strategies involve lowering qualifications for borrowing, financial experts era that conditions may b ripe or another housing collapse.

According o a recent Newser article, Fannie and Freddie are backing mortgages with just 3 percent down – far from the usual 20 percent down payment expected under current lending standards.

That goes along with other measures taken by the Federal Reserve to open up borrowing, which include requesting that credit scoring giant Fair Isaac Corporation lower its credit scoring requirements to allow more borrowers to qualify for loans on homes and other big items.

The move to lower standards comes as an ironic backlash to recent legislation aimed at tightening lending standards to improve lender accountability and consumer protections The much publicized housing collapse of a few years ago was caused in large part by the reckless and often fraudulent lending practices of the nation’s big banks.

In the days of the so-called housing bubble, unqualified borrows were able to by homes with very low down and deceptively low monthly payments – at least at first. But as those easy initial payments ballooned into unmanageable ones, those homeowners fell into default and foreclosure by the millions.

The crash exposed massive and widespread fraud and mismanagement on the art of lenders both big and small, but especially the nation’s biggest banks, including Bank of America, Chase and Citigroup. That led to a string of lawsuits for fraud and other charges, with settlements in the millions to customers and the government. As the dust settled, new legislation in was passed to further establish accountability on the lending industry and create safeguards for consumers.

Those safeguards, mainly in the form of provisions in the sweeping Dodd Frank Act, established a set of new standards for “safe” mortgage lending. The Qualified Mortgage Rule, which took effect in January 2014, imposed higher credit scores, a lower debt to income ratio and minimum down payments around 20 percent for home mortgages. Loans that conformed to those standards were considered “qualified” and exempt from prosecution for bad lending.

But the entirely predictable outcome of those changes was that fewer people applied for mortgages. Ad of those who did apply, fewer approved. The economic turmoil of the past few years had taken its toll. More potential borrowers were struggling with past credit issues and current job instability. Many of them just didn’t have enough available cash to make a 20 percent down on the loan.

The result: fewer mortgages, and a slowdown in home buying. While that was good news for the rental market and b y extension investors in rental property, it didn’t help the housing recovery too much. There had to be a way to bring people back to home buying, especially those first time buyers who were locked out for financial reasons.

That’s when government financial experts decided that rather than work on improving the qualifications of hopeful borrowers, it was easier to capitulate and lower the standards. And so it did, beginning with a gentle relaxing of the QMR down payment requirements to allow smaller amounts if other factors met the standards.

Then came the unprecedented Federal Reserve request to the Fair Isaac Corporation to lower its famous credit scoring standards to reduce penalties for some kinds of loan defaults and other credit problems. Individual lenders, too, opted to flex on loan requirements, especially for applicants whose credit problems came from a previous foreclosure or mortgage default.

Now, Fannie Mae and Freddie Mac are hopping on the bandwagon too, with their new decision to underwrite loans with as little as 3 percent down. Both mega lenders stress that to qualify for the new low down payments, borrowers still have to meet credit and income standards, and not everyone will qualify.

But housing industry watchers see in the new easing of lending standards a return to the loose lending practices that contributed to the crash. They fear that borrowers who can’t manage standard down payments wont’ be ale to manage mortgage payments either – and that could lead to another round of defaults and foreclosures that sends the housing industry into chaos once again.

That’s not likely to happen, counter supporters of the changes. The lending environment is different now, with more accountability. And the economy has improved in other areas as well. Still, the 2008 collapse casts a shadow over the emerging recovery.

King Solomon recommends approaching any undertaking with wisdom and prudence – and that applies to predicting the future of real estate as well. But for investors hoping to build wealth with income property as Jason Hartman advises, the new lending landscape could offer opportunities as well as challenges. (Featured image:Flickr/milestonemanagement)


Gidman, Jenn. “The 3% Mortgage Down Payment is Back.” Newser. 9 Dec 2014

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The Solomon Success Team



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