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....
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