Friday, July 6, 2018

"With fewer people being able to afford homes, Freddie Mac seeks widespread expansion of 3% down mortgages"

From Dr. Housing Bubble, June 27:
Low down payment mortgages are creeping their way back into the market like a cat sneaking up on an unsuspecting mouse.  The only difference here is that the mouse is a million dollar crap shack with a 30-year mortgage attached to it.  People forget that Freddie Mac and Fannie Mae, the massive Government Sponsored Entities were nationalized U.S.S.R. style during the Great Recession.  Now that times are good all caution is being thrown into the wind and we are setting up the stage for Irrational Exuberance Part II.  The U.S. economy is built for boom and bust cycles.  Massive credit expansion is occurring and while people are working, their dollars are not stretching as far as they would expect.  In San Francisco, you are now considered “low income” if you make less than $117,000 a year.  That makes sense when a standard home sells for $1.5 million.  So now we have Freddie Mac attempting to push 3% down mortgages on a much larger scale since many people are priced out.  What can possibly go wrong?
Who needs a down payment?
There are costs associated with buying and selling a home beyond the mortgage or the down payment.  You have closing costs and in many cases, there are commissions to pay out once escrow closes.  These may range from 3 to 5 percent.  So when you purchase a home with a 3 percent down payment, you are essentially putting yourself in a zero or negative equity position from day one if you needed to sell.  Any little dip in the market can put you in a tough spot.  Say prices drop by 10 percent and we have a modest recession.  Then say you want to sell.  Now you find yourself underwater and will need to pay to sell which was the case when we had our foreclosure crisis....