Thursday, October 30, 2008

Down Payment Requirements and Availability of Funds

Two things to address today: down payment requirements and funds available for mortgages.

There was a story on the news last night saying that borrowers will soon need 20% down to buy a house. That is NOT true. Down payment requirements are determined by the secondary market (Fannie Mae, Freddie Mac, Ginnie Mae) -- companies that buy loans from the lenders, securitize the loans (package them up in large "pools"), and then sell them to large investors (mutual funds, foreign governments, etc.). They decide what the down payment requirements should be based on the rate of return the investors are demanding in order to buy the mortgage backed securities (MBS). There is very little demand for sub-prime MBS because many of the loans go into default. However, there is an almost insatiable demand for US prime mortgages within the investment community. FHA loans have always been guaranteed by the US government, and now Fannie Mae and Freddie Mac loans are guaranteed by the US government. If someone has 3% down for a primary residence and a credit score above 580, they will have very little trouble getting a loan. The investors want to buy them because they're backed by our government, so there's no reason to raise the down payment requirements.

No one in the mortgage industry can make any money if no loans are made, so it is in no one's interest to make it hard to get a loan.

Which brings us to the availability of funds. Many people have called us in the past week asking if there is money available for loans. Please don't listen to anyone who tells you that funds for loans are not available or are shrinking. Anyone who tells you that is seriously misinformed. There may not be money available from a particular lender because they had shady lending practices, or because they maintain their own loans rather than sell them on the secondary market (lenders who keep their own loans are known as portfolio lenders - they keep the loans they make in their own investment portfolio). However, as long as big investors want to buy securities that are backed by the US government, there is absolutely nothing to worry about.

The flow of money within the mortgage finance industry is extremely complicated and very few people who have not studied it can understand it. It's easy to get on TV and in the papers by announcing that no one can get a loan without 20% down, or by saying the money for loans has dried up, so people make stuff up or repeat what they heard from someone who didn't know what they were talking about. Please don't ruin your business by telling your buyers it's hard to get a loan or that there's no available money. It's simply not true.

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