Is creative financing a thing of the past?

After revisiting Elizabeth Warren's writing, I return to the topic of lending. There are ways to borrow for a house with less than 20% down. You can, but should you?


Some people seem to have never heard of the mortgage meltdown of 2007. They show up in my practice  (usually on the phone) upset and unhappy because they can’t borrow as much money as they thought they could, and the &^%*# lender wants so much documentation. They ask whether I have a reasonable lender for them to talk to.

Today, I write to the people who just walked into the world of real estate and are wondering why lending is the way it is:
In the book, The Big Short, Michael Lewis explains the details of the conversion of mortgage notes into a bond commodity. At some point in the Bubble years, the way that the bonds were rated became strongly weighted on the credit score of the borrower and less weighted on the borrower’s income and ability to repay. This created a market for mortgages with borrowers who had high credit scores. Their ability to repay the mortgage didn’t much matter. When everything collapsed around this questionable valuation of notes, the banking industry tightened their standards.

Some think they went overboard. Have they gone overboard, or are they simply protecting their investor’s assets? The truth about lending lives somewhere in between the free-for-all of the mid 00s and the tightening that started in 2007.

Yes, today there are mortgage programs for people with less than 20 percent down. There are programs with as little at 3 percent down. There are several programs available. Two examples are FHA and Mass Housing. The requirements for each of these low down payment loans vary. For example: Mass Housing has income restrictions. All of these programs have credit score requirements as well as some other underwriting requirements. Check with your lender for details. Mass housing has just introduced a 3 percent down payment loan program with no MI (mortgage insurance). Rates on all these programs are at typical market rate.

Other “creative financing” is still available, too. For example, there are combo loans available. This allows the home buyer purchasing a high end property to get a conventional fixed rate mortgage instead of a jumbo rate mortgage (which is higher.) It is done by getting two loans on the property -- a 1st and a 2nd mortgage. This way, neither loan will surpass the jumbo loan limit.

To do any of this fancy footwork, you need to have excellent credit and steady employment. You also need to be buying a property that isn’t distressed in some way (low owner-occupied condo complex, very poor condition.) Special programs, like FHA, scrutinize the condition of a property and frequently fail something that needs work. (I’ve had sellers need to repaint a garage to pass FHA muster.)

Some of you think the only way to regain sane pricing is to require 20 percent down. Yet would-be buyers have been frustrated by the immensity of a 20 percent down payment at these high prices. Are you one of those would-be buyers?

Investors are happy. Flipping is still in style at FHA

 From the Office ofthe Federal Register:

 

“This notice of waiver extension announces that FHA is extending the availability of the temporary waiver of its regulation that prohibits the use of FHA financing to purchase single family properties that are being resold within 90 days of the previous acquisition, until December 31, 2014.”

Huh? In typical government-speak, this is not a change. It is an extension of a change. The waiver is being extended. Then again, the waiver is not even really a change, but a waiver of a rule (the dis-allowing of FHA mortgages for sellers who didn’t own the house for 90 days or more) that was the change from the previous FHA rules. Get it? Probably not… 

Now, let me give this to you in English:

The FHA will allow buyers to use low down-payment mortgages to purchase houses from owners who have had the property for less than 90 days. This will be allowed until the end of 2014.

The history of this is that in 2003, the FHA stopped allowing mortgages for purchases from sellers who had not owned the property for more than 90 days. This was in an attempt to reduce irresponsible selling and buying that was happening during the real estate bubble. Yes, there was evil-doing going on in 2003. There were a bunch of scams flying around:

1. People would buy a place with no down payment (or even negative equity), live there for a year or two without paying a mortgage.

2. People would do number 1, then have a business partner buy the place at foreclosure rates and resell it for a higher price a month later.

3. There were people who paid-off appraisers to get loan approvals for worthless places.

4. There are people who borrowed when they had no means of paying the mortgage from day one.

There were lenders, attorneys, real estate agents, appraisers, and many others with dirt on their hands.

FHA thought they would stop all this by slowing down the time a seller needed to hold a house before selling it to a low down-payment buyers. This would keep the profit level down and keep some of the greedy people out of the game. With that rule, flipping activity slowed down.

The 90-day hold rule was waived in 2010 to help clear the foreclosure inventory that was not getting resold. Sellers could flip property in less than 90 days again. To protect consumers (and lenders) from fraudulent flipping practices, the oversight of the lending process has changed (and improved.) Borrowers face greater scrutiny and the appraisal process has become more objective. 

To be eligible for the waiver of the Property Flipping Rule, an FHA-approved mortgagee must ensure that the mortgage meets the following conditions:

1. All transactions must be arms-length, with no identity of interest between the buyer and seller or other parties participating in the sales transaction.

a. The seller must hold title to the property. If the property is held by corporate entity, it has to be operated legally.

b. There is no evidence of repeated flipping of the property.

c. The property was marketed openly and fairly

2. In cases in which the sales price of the property is greater than 20 percent above the seller's acquisition cost, the mortgage qualifies if:

a. Two appraisers justify the increase in value with documentation of repair and improvements.

b. There is a property inspection and inspection report provided to the purchaser before closing by an FHA-approved inspector. (The inspector must be arms-length to the sale as well.) At a minimum, the inspection must include: the property structure, including the foundation, floor, ceiling, walls and roof; the exterior, including siding, doors, windows, appurtenant structures such as decks and balconies, walkways and driveways; the roofing, plumbing systems, electrical systems, heating and air conditioning systems; all interiors; and all insulation and ventilation systems, as well as fireplaces and solid fuel-burning appliances.

3. Only forward mortgages are eligible for the waiver. Mortgages insured under HUD's HECM program are ineligible for the waiver.

For the whole list of eligibility requirements