|
|
The Big Print Giveth
A news report and some gyrations in two government-assisted loan programs combine to help hone buyers understand why lenders are so fussy about down payments.
And, by themselves, the changes in the loan programs are enough to convince homebuyers that the world is an inherently unfair place.
The news report says that mortgage delinquencies suddenly increased late this summer. Late payments didn't increase a lot, just a couple of percent, but the rise intercepted an 18-month decline.
Predictably, the new delinquencies were centered in New England and California.
However, there was a statistical oddity: the surge in delinquencies was entirely attributable to FYHA and VA loans.
Which leads to a story.
FHA and VA loans are distinguished from the rest of the mortgage world by having the lowest down payment requirements of any loan types. FHA loans allow financing of more than 96% of the sales price, and VA loans require no down payment at all.
A depressing concept in the money lending business is that the bigger the down payment, the more likely you are to get paid back. Further, if the down payment is the borrower's own, hard earned money (as opposed to a gift, or borrowed from someone else), you are even more likely to get paid back.
This down payment theory is as old as lending, and tends to explain why the FHA and VA have so much trouble with delinquency.
You would think that after 60 years of FHA lending, and 45 years of VA experience, somebody would have figured out a solution to the high delinquency problem.
However, these are government programs we are talking about, here. The agencies are trying, but results have beenelusive.
The "gyrations" mentioned above began, in the FHA case, a couple of years ago, with the imposition of a half percent surcharge on loans to pay the FHA back for its foreclosures. This fee is actually a sur-surcharge, as the existing fee worked out to about a third of a percent per year.
With the new fee, FHA mortgage insurance costs half again the fee charged for a private sector low down payment loan.
The VA has made two recent changes, and the net result downright cruel.
For 44 years, sellers of VA-financed homes had to pay a couple of percent of the loan amount in "points" so the veteran could get the below market, VA-set interest rate. The veteran was not allowed to pay the points, even though everybody knew the cost of the points was being added to the sales price of the house.
In any reasonable real estate market, the seller wouldn't pay, or the marked-up sales price couldn't survive an appraisal.
Late in 1992, the Veterans Administration suddenly allowed Veterans to pay their own points, and, even better, gave up on setting rates, which allowed "zero and zero" pricing. VA loans became the best deals anywhere.
Alas, the big print giveth, and the fine print taketh away.
Effective October 1993, the VA will just about double its foreclosure premium (known as the "VA Funding Fee," expressed as a percent of the loan amount) to 2.00% for first time VA borrowers. It will be 2.75% if you were "only" in the Guard or Reserves.
The fee will triple if you ever try to use your VA benefit again for another primary residence after selling the first one.
You should have known the VA wouldn't leave those points just lying around.
Adding idiocy to insult, these new premiums can be added to the loan amount, still nothing down, resulting in 103% financing in many cases.
Does the Federal government think that a negative down payment will reduce the foreclosure rate?
Unfortunately, government theory assumes that if you have a costly and stupid practice, you must continue it, but raise fees to offset the cost.
Whatever you do, don't remove the cause of the cost.
The real problem is that it's easier to qualify for an FHA or VA loan than for private sector "conventional" loans.
Too easy.
For example, a veteran with no down payment can qualify for a house payment equal to 44% of gross income. In the private sector, the maximum house payment for a small down payment loan is less than 30%.
There are condos in Boulder that no one in their right mind would finance to 96% -- except the FHA.
Also, for both VA and FHA loans, the borrower need not have one single dime in savings: family can give the borrower the whole down payment and all closing costs.
These government loans, which helped many creditworthy people to buy their first homes, are now so fee-heavy that many of the users are the poorest credits buying the shakiest properties.
Tighten standards? No way: these are "assistance" programs, and "benefits".
The weaker the borrowers, and more troublesome the properties, the higher the delinquency and foreclosure rate. Which means more fees, and ultimately an implosion, and someday the loss of two of the best deals America ever had.
Yer governmint at werk.
|
