The possibility of Great Meltdown, Part II
I just finished reading an article wherein the writer suggested that a new housing bubble, and subsequent crash, could be on the horizon.
He referenced several indicators, most of which didn’t really seem all that ominous, but his major premise was that borrowers are taking down a lot of FHA insured, and VA guaranteed, loans, which require just 3.5 percent of the purchase price as a down payment, or none at all, in the case of VA deals.
He then cites an academic specialist in housing trends who decried current attitudes, opining that, “The notion that you need to save a lot of money to buy a house is again being treated as so much baloney.”
Now, I wouldn’t make book on whether or not there may be another housing crisis: If we’ve learned anything in the past eight years it’s that you can predict the weather with infinitely more accuracy than economic developments or politics.
But I’ve got news for the professor: Since 1945, the majority of Americans never saved a lot of money for a down payment. In the ‘40s, ’50s and ’60s federally guaranteed loans were by far the prevalent financing vehicle used by most middle class Americans to buy homes, and the system worked just fine.
Back in the latter half of the 20th century, banks and savings and loans made loans that they kept in portfolio, and those required at least 20 percent down. But the housing explosion that followed World War II, and created suburbia, was financed by government guaranteed financing with minimal, or no, down payment. It wasn’t just an economic revolution, but also a sociological one. The United States became the first nation in the world where the majority of the population was made up of homeowners, as opposed to renters, and, at the same time, major cities started to deteriorate because the people that cared about them migrated outside of them.
The whole thing worked because, quite simply, borrowers made their house payments. People, I know, roll their eyes when an old codger tells a “back in the day story,” but I’ll do it anyway. When I first got into the lending business in 1961, to qualify for an FHA loan, a borrower’s ratio of principal interest, taxes and insurance (PITI) payment to total income couldn’t be over 20 percent, and the ratio of total debt, including PITI, couldn’t exceed 25 percent, the so-called back ratio.
Today, that back ratio is at 43 percent, which prompts some pundits to point to the higher number as a symptom of looser lending.
But there’s an element that these experts overlook, or don’t even know: Back in the ’60s, when a couple bought a home, the wife’s income was almost never counted in qualifying for financing. After all, women have babies, and everybody knows that things go to hell in a handbasket when that happens. And this wasn’t an arbitrary standard instituted by lenders. It was the official underwriting guideline of the federal agencies, FHA and VA. When you realize that half of the country’s work force is no longer treated like second class citizens, then that 43 percent looks pretty conservative.
From 2000-2008, the problem wasn’t the amount of down payment. Rather it was that loans were made to people who couldn’t pay them back and, in some instances, actually never intended to. Borrowers were allowed to “state” their income, and, surprise, surprise, they stated whatever it took to get the loan.
Another Old Codger Tale: In 2006 when I was actually a banker, I spoke to a mortgage broker who had a great deal that he wanted to get funded. The loan amount was close to $400,000, and the borrower was a librarian in a public facility.
My first reaction was that this job probably didn’t pay enough to qualify. I asked about other income.
Nope, just the borrower’s salary, which would be $90,000 per year.
Stupid me: “$90,000? How can that be?”
“Because that’s how much she needs to qualify,” replied the broker, who, I’m sure was thinking, “Idiot.”
To avoid another Great Meltdown, it’s probably a good idea to remember that lenders who make loans to borrowers who demonstrate an inability to pay them back aren’t going to be around very long.
Pat Dalrymple is a western Colorado native and has spent almost 50 years in mortgage lending and banking in the Roaring Fork Valley. He’ll be happy to answer your questions or hear your comments. His e-mail is firstname.lastname@example.org.
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