Was one more nail in the mortgage industry’s coffin hammered in on December 21, 2015?
We are not, and some could argue that we may never, be fully recovered from the huge mortgage fiasco of a few years ago. Although many people have different opinions on what caused the mortgage crisis, this former loan officer and current real estate agent attributes it to several reasons. The main issues I saw were: 1) Somewhere along the line, the government promoted the opinion that homeownership is a right as an occupant of the United States, rather than a privilege and conscious choice for a person who is financially ready for the investment and maintenance that owning a property entails. 2) The government went too far in its effort to “protect” the “underserved” groups of the population by actually monitoring and fining large and small banking institutions that simply didn’t have their prescribed mix of borrowers in their portfolios. As a result, loans that shouldn’t have been made to borrowers who weren’t financially ready were pushed through to make sure the quota was covered. The sad part is, while these rules seem to care for the economic underdog, they actually hurt the people they profess to help, because those people simply aren’t prepared for the $5,000 expense of replacing the AC unit, or the $10,000 roof repair. Also, just the mortgage payments themselves proved to be unaffordable for many. In spite of this disaster, the government is back at it!
A new Fannie Mae program called “HomeReady” took effect on 12/15/2015. It reduces the income requirements, down payment requirements, and mortgage insurance requirements below those of even a current day FHA loan. You remember the FHA loans, right? They took place of the previously labeled now taboo “subprime” loans. They have a lower credit score requirement, higher debts allowed, and looser credit report rules. They are also the loans that when their buyer loses the home it is taken over by HUD. Have you seen many HUD foreclosures? We all have. So, take those standards and dip them lower to get a larger group of unsuspecting, unprepared borrowers so we can make a bigger foreclosure market and a larger financial problem for the people that are already not making it by even today’s standards.
Here are the basics of the HomeReady loan:
- Minimum 3% down payment
- NONE of the down payment has to come from the actual borrower! They can use grant money, grants, gifts, and the never allowed before CASH ON HAND. The cash on hand is such a no-no in the industry that it has caused home purchases to be delayed and even get turned down because the borrower couldn’t document where the cash came from. The reason that it is an issue is claimed to be that they need to be sure that the funds aren’t from terrorist sources OR are not that of someone other than the borrower. Yet, here on the new loan, those issues don’t seem to be a concern.
- REDUCED Mortgage Insurance coverage for loans that have less than 10% down payment! This is where you want more insurance coverage, as these buyers have less to lose if the 3% isn’t even theirs!
- Homeowner Education Requirement: A mere 4-6 hours to learn everything you need to know to become a homeowner with an online test.
Click here to see a comparison chart showing how HomeReady stacks up to Conventional loans and the MyCommunityMortgage (which has quietly passed away).
Yes, it appears that it has a higher credit score requirement than you would expect, but there are efforts in motion to allow VantageScore to be used instead of the traditional FICO scores, which will allow rental payments and utilities as sources of credit history. This change some are saying would add 100 points to everyone’s score or create credit history where there was none before. It’s arguable whether or not these payment histories of non-traditional credit sources are indicative of a borrower’s ability to pay a large regular payment like a house note. When you don’t pay your cell or electricity, they turn off those services. When you don’t pay your house note, it can take months or years to lose it to foreclosure, so the penalty of not paying is even less of an immediate concern.
What’s even more interesting is that I am not hearing any chatter on the typical mortgage and housing channels on this supposedly sweeping edict of benevolence. There are a few small articles, but not nearly the amount of attention it should be getting. Lenders, please share what you know and let us know what you’ve heard!
Hopefully, individual lenders will not be eager to jump aboard the HomeReady bandwagon. However, if the government convinces them that they will (again) be bailed out when foreclosures happen, they may very well embrace this insanity. If this occurs, many knowledgeable people in the real estate and finance industries fear that another meltdown could occur that would be far worse than what we’ve already lived through.
One loan officer we’ve spoken with said that a lender in her portfolio with this program has added additional rules called “overlays” on top of the basic guidelines, but they don’t have all of the details yet on exactly how it will work.
We are excited to help people buy their homes, and do it all the time. Yet, we feel it is irresponsible of the government to seduce buyers into an attractive, but potentially damaging financial situation which they may not be capable of sustaining. Furthermore, with these “low cost” loans being offered, the future of our industry and economy continue to be jeopardized without disclosing the true price tag to the public and unsuspecting buyers.