We never learn…
How close are we? Like 2004 or 2005 or 2006 or 2007… No fear in buying, bid aggressively…
I’m less worried as long as they are limited to very, very high FICO scores. FICO score had the highest correlation to predicting default.
I’m not worried about a soft RE market because looking forward to buy one more SFH in SV. I’m worried that the decision maker decides that she would not wait and overpay aggressively just like 2007.
The republicans are, or worked on taking down Dodd-Frank while we were as imbeciles watching the Comey movie.
Though, I think these loans have been out there for quite some time but not that visible.
FICO score may have, or doesn’t have anything to do with this once you add the “stated income” to this recipe, a disaster in the making.
I am not worried in any way
Under Guild’s program, a borrower could pay as little as $3,000 down for a $300,000 condo on a 30-year fixed rate mortgage. The applicant would need to prove their debt-to-income ratio is 50 percent — much higher than that what most lenders typically approve — or lower.
a default is not automatically a loss to the bank. You remember the term “strategic default” (* 2009)?
Borrowers with high FICO scores and enough funds/ income to service the debt did those.
If a borrower with an 800 FICO defaults on a 990k loan that is secured by a house worth 1M, the bank will take a small loss (missed payments, cost of foreclosure)
If a borrower with a 600 FICO defaults on a 500k loan that is secured by a house worth 1M, the bank will not take a loss. Most likely the borrower will sell, worst case, the bank will recover everything through foreclosure.
It doesn’t take a massive crisis like 2008 to make ‘strategic default’ look like the best option. Think of uninsured calamities. A nice flood or landslide. I’ve seen a few houses like that. One in Felton just 3 months ago.
In summary, I think low down-payment loans increase the lender’s risk.
We touched on this before…
There are plenty of references of strategic default. Here is the exact scenario. Owner bought a newly constructed 4400 sqft home for $790k in 2004, value went up to 1.25M during 2007 peak, took cash out refinance and then Heloc to matching the value 1.25M. Market went down, filed Short Sale, bank reviewed and approved $740k short sale price in 2011-12.
I do not know where did the owner keep the refinanced+heloc money, but he is wealthy even today and I know he lives somewhere at Kansas state !
How I know? The short sale buyer is me !
I agree that low down payment increases the lender’s risk. However, it doesn’t correlate with increased chance of default. Defaults are what got the crisis going. People could have zero equity, but the system would keep going as long as they make their payments on time.
I don’t know, I think if people have less skin in the game (low down payment) there is a higher chance that they may walk early in the game if some calamity does come up. Someone paying a normal 20% down probably won’t or “can’t” give up so easily. I don’t have necessarily any real evidence but I can see how it could work out this way…
We are so tied to our credit scores now. There’s even TV commercials about it. It impacts buying/renting a home, buying/leasing a car, credit card rates, ability to get student loans, insurance rates, etc. Most people won’t tank their credit score unless it’s a last resort. The person that already has a trashed score just doesn’t care. Plus, they’ve already proven they pay late and default on things.
This is what I am trying to find out. There’s a plethora of institutions now giving loans to x or y people, with lower or not fico score, then I heard of stated income and so on.
You can discuss all aspect of loaning, lending, borrowing, defaults and whatnot, but what we don’t touch on this topic is that this state is a forgiving one. Most anybody can work for Google and any other company and enjoy their perks, the issue of IPOs and so on. They get cocky, greedy, and buy a mansion because as they know and heard everybody is enjoying that almost immediate equity from that property.
The way it worked prior to the last bubble is what I am starting to see. The relaxing of the rules of engagement. Now, any goof FICO score assures you an expensive home. Money is out there, no problem, what is a problem to me is that easy way out from the responsibility of owning a home. Once CA changes its status of non-recourse, believe me, even some investors here would be shaking in their boots.
Voicing the comment Jil made, I know of a guy, very well known in the financial industry. I had the chance to work with his dad once painting a home. I asked him how his kid was doing and he said “oh boy, he is killing it, he is earning about $20K a month”. Then our conversation went to how many properties he had. It was 2009 then. He replied, “well, he walked away from this and that house in such and such city but he kept the one in Los Gatos”. My jaw dropped to the ground big time.
Now, tell me, how a bank can consider this gentleman worthy of anything?
Credit scores equate to real money in a lot of cases as you described. Both the downpayment and the credit score are borrower’s stakes in the game. A rational person would weigh how to maximize his gain or minimize his loss by considering both factors before a strategic default.
The article says 680 required score. That’s much higher than the FHA min of 580. FHA allows below 580 if the buyer puts over 10% down. FHA is a federal government program. The federal government is doing more to lower lending standards than anyone else, and tax payers are obligated to cover FHA losses.
I shouldn’t paint with a broad stroke, but think about it, chances are if someone has barely an “adequate” down payment (like $1k) their thinking is not like yours or mine (necessarily concerned about our credit scoring and impact thereof if default). At the end of the day, minimum skin in the day raises that possibility of default that much higher…
That or they own FANG stocks that are going up like crazy and don’t want to sell for the down payment. Why not keep the stocks AND buy the home? There are different reasons people choose to leverage and minimal down payment is a form of leverage.
That would be increasing risk exposure. If tech businesses shrink, tech stocks would decline so would house prices. This is not going to end well. This is what WB meant by “when the tide subsides we would know who are swimming naked”.
As long as the person keeps their job, then they can ride out the tide.