By Kim Olson
Gone are the days when you could “put nothing down” to get a home mortgage. Lenders are pushing for bigger down payments, and want more money down, forcing borrowers to rethink just how much house they can afford. The developments come as the nation’s largest mortgage lenders, Bank of America, Wells Fargo and Citigroup admit in public filings that they are likely going to be facing sizeable financial penalties for abusive mortgage practices.
The penalties are expected to run into the billions of dollars as part of the robo-signing scandal, which until now banks have emphasized were only a threat to their reputations rather than balance sheets. However, in disclosures made to the Security and Exchange Commission (SEC), statements suggest that a settlement with state attorneys general in all 50 states investigating the improprieties will have a major financial impact on mortgage lenders.
Bank of America stated in the SEC filing that the investigation “could result in material fines, penalties, equitable remedies or other enforcement actions and result in significant legal costs.” Wells Fargo admitted in its filing the enforcement actions will initiate possible “civil money penalties.”
A Return from “Loan to Own”
When older Americans bought a house, lenders required a substantial down payment and proof they could actually afford mortgage payments. However, from 1997 through 2006 banks and mortgage companies developed new loan products and made what became “Loan to Own” mortgages to the conventional market. Lenders made millions of mortgages, which they knew had little chance of ever being fully repaid.
Now banks are returning to old practices, requiring down payments of 20% or more. The Obama administration is pushing for a gradual increase in down payments on conventional loans, meaning those guaranteed by Freddie Mac and Fannie Mae of at least 10%.
Average of 22% and Rising
In nine major U.S. cities last year, the median down payment was 22% on conventional mortgages, which was double what had been paid three years earlier. It’s also the highest median down payment required since records were first kept, beginning in 1997. The sharp reversal indicates a major change in the mortgage financing system has already developed.
In 2006, the average down payment was only 4%. While that may have made it easy to actually buy a home, it also left many homeowners grappling with inflated mortgages they couldn’t afford, eventually resulting in the foreclosure crisis.
Even those who could avoid foreclosure aren’t necessarily avoiding hardship. That’s because those who have been able to stay in those homes owe more on them, in most cases, than they’re actually worth in market value today.
Those shopping for homes these days also pay more to borrow money. That means the housing market is likely going to stay soft and that housing prices should continue to drop in many areas of the country.
Borrowers who don’t qualify for conventional loans are turning to alternative options, such as loans backed by the Federal Housing Administration, or loans for veterans. FHA loans require 3.5% up front at closing, but interest rates are higher and private mortgage insurance is also required with minimum down payments, which means higher monthly payments.