Lost in the celebration, however, was a regulation in the Dodd-Frank Act that requires a 20% down payment for a loan to be deemed a “qualified residential mortgage.” If a buyer does not have 20% for a down payment, the lender must retain 5% of the credit risk of any loan they securitize. And then costs will be passed from lenders to borrowers in the form of additional fees on loans with less than a 20% down payment.

This regulation, if enacted, means that 70% of buyers will be left out in the cold. Approximately 2.7 million borrowers made down payments of less than 20% in 2010. In addition, 10.8 million homeowners with outstanding mortgages have loan-to-value ratios of more than 80 percent. And another 11 million homeowners owe more than their home is worth.

Should the 20% become standard, more homebuyers may seek out Federal Home Administration mortgages, which allow down payments as low as 3.5%. The FHA is not in favor of a customer increase, because they are looking to decrease their 30% share of the mortgage market, and so have raised annual premiums and plan to enact higher loan limits in September.

Regulators will most likely reach a compromise, noting they are sensitive to not kicking everybody out of the market.

Present Value LLC is a worldwide international appraisal and advisory company that provides a range of professional services such as Certified Machinery and Equipment Appraisals, Inventory Appraisals, Asset Verification Services, Business Valuations, and Real Estate Appraisals. Contact us today!

By: Present Value

Additional Reading

Much Rejoicing as Financial Reform Bill Passes

The Dodd-Frank Wall Street Reform and Consumer Protection Act

FHA Loans

According to an article published in The Wall Street Journal on Tuesday, the FHA is making good on its promise. It suspended Home Mortgage Inc. for six months and pulled the licenses of three other lenders, Strategic Mortgage Corp., ProMortgage Inc., and Americare Investment Group Inc. The FHA said that Strategic Mortgage Corp. and ProMortgage did not uphold the FHA’s loan standards, Americare violated previous settlement terms, and Home Mortgage was suspended for failing to disclose an owner’s indictment. You can read the full article here.

Present Value is an FHA certified appraisal company. 

By: Present Value

This week, The New York Times published an article discussing the effect that FHA loans currently are having on home sales. The article says that three years ago, FHA-insured loans made up 2% of the market and now, 25% of the market is backed by FHA-insured loans. That’s a huge jump in a very short amount of time. Clearly, the FHA’s plan to help potential buyers secure financing is working.   

Traditionally, FHA-insured loans were obtained by people with less-than-perfect credit scores. Banks were more comfortable lending to riskier borrowers if the loans were insured by the government because the bank would be protected from a loss should the borrower default on the loan. But because financing is so difficult to secure right now, people who would have gone after a conventional loan in the past now have to look into FHA-insured loans to receive the financing required to own a home. To read the full article and see how this trend is affecting New Yorkers, click here.

By: Present Value