QRM, Skin in the Game, and the Abdication of Conventional Wisdom
If everyone put 20% down on their home that the housing market would probably be healthier. And in other news, if I french kiss a skunk, I won’t be the most popular guy in an elevator. It’s all theory. Not everyone can put 20% down. In practical application it is a terrible idea. And we’ve known that since FDR was in office.
I have read quite a few pieces of commentary in support of government initiatives to marginalize FHA and other high LTV (which is to say low down payment) mortgages, because the of the defective notion that if people don’t have “skin in the game” that they’ll be less likely to pay their mortgage.
Let’s be clear. The vast majority of people who aren’t paying their mortgage are in hardship. They may have no equity, low downpayment or not, but that is an effect, not a cause of their position. Of my residential 44 listings, almost 20 are “short sales” where I’m going to have my clients walk away from the closing without a penny for the privilege of avoiding a foreclosure and leaving their home with dignity in the hopes of a fresh start down the road. Many of them had 20% or more equity at one time, and the downturn erased it. But their reason for selling is the loss of a job or loss of income, not their equity.
The argument for supporting QRM (qualified residential mortgages) is a poor one. I have 70 years of sustained prosperity in American housing, the backbone of which has always been the FHA and its 3.5% downpayment, to support that statement. Mandating that more mortgages have a 20% or more downpayment is fixing what isn’t broken. The housing crash turned our world upside down, but it ought not cause us to burn our axe handle to generate some heat.
Among the arguments against lower downpayment loans is that the day a person closes, they have little or no equity.
So what. Even when real estate was appreciating in a consistent way (which is to say, the last 70 years prior to 2007), conventional wisdom was that if you sold your home less than 5 years after purchasing that you’d most likely lose or break even, because of closing costs and brokerage fees. Even if you had equity and proceeds, you’d lose. So what changed?
As I type this, almost 40% of all residential properties with a mortgage in the USA are under water. With rare exception, the only people who are not paying their mortgages are the people who can’t. People want to stay in their homes as long as they can afford them. If they can’t afford them, they have to sell whether they have equity or not.
As long as we continue to fall on our spear with ill-conceived government “fixes” that do nothing but perpetuate misery, the fool’s gold “solution” of raising down payment requirements rings as true as “let them eat cake.” Sensible, responsibly underwritten, full documentation mortgages with low down payments are part of the solution and always have been. Millions of them brought about sustained and stable prosperity from the onset of the FHA in the 1930s through the growth post World War II America.
It is a slippery slope to marginalize lower downpayment loans. If we do, FHA and other backbones of the economy are next. And this is too important to politicize.