Starting in the late 1980’s, I worked for Maryland’s Community Development Administration in the housing finance division and then after leaving CDA, worked for a couple of private mortgage lenders until moving to Maine in 2004. The key to keeping foreclosures to a minimum is strong underwriting. Back then, an applicant’s income, assets and credit history would be verified and then reviewed by a human underwriter (not a computer.
Death, unemployment and divorces guarantee that there will always be a percentage of foreclosures. This is true for buyers putting a minimum down payment or for those putting 20% or more down. Our national housing nightmare began when banks made available no-down payment loans, passed the risk to distant investors while simultaneously reducing underwriting standards. In the rush to originate more loans, all of the lending fundamentals went out the window!
So I think the administration’s proposal to require stricter down payment requirements would make it harder, if not impossible, for many people to purchase their first house. For years, programs such as VA, FHA and others operated successfully while utilizing proper underwriting. Rather than creating more obstacles for home buyers, there needs to be a greater focus on returning to fundamentals. For more details, read this Washington Post story.
I’m also frustrated with how the banks are handling their current inventory of foreclosed homes. Just one example–we have a settlement scheduled for this Friday on a small foreclosed home that needs some work. The buyer is aware of the problems and is willing and motivated. Even though it is a cash transaction, it has been difficult to work with the seller, where all terms are in their favor but the buyer is penalized if there is a slight delay on their part. The emphasis right now should be for the banks to streamline the process to make it quick and efficient as possible so that these distressed homes, which are a drag on the market, get occupied once again.
I have been saying all along that a return of employment stability is required for the housing market to rebound. As we seem to be headed in that direction, the banks and the federal government seem determined to construct roadblocks.