patrick.net

I agree with ptiemann. Most have two loans. One loan in lieu of a down payment, and another loan to cover the rest.

Even for the ones that have put a down payment, years later they refinanced and also took out at least 100% of their down payment with a HELOC.

Then the amount on the second mortgage would be "recourse", I assume -- even in a non-recourse state like California.

Cheers.

There is no doubt that borrowers with less "skin" (down payment) will have a much higher percentage of defaults than those with more. Back in ancient times, U.S. banks required 20% down. FHA (i.e. government insured loan) that pretty much changed everything by offering 2.75% (been recently upped to 3.5%) down loans along with liberalized qualifying ratios and underwriting practices that led to more homeowners. Originally, FHA was designed for first time homebuyers but, in relatively recent times, has morphed into pretty much the lender of last resort for the average American homebuyer. During the creation of the real estate bubble, FHA did practically nothing due entirely to the fact that conventional loans were offering zero down, interest only, liar loans (no documentation), etc. It only stands to reason that if a borrower has more money in the initial down payment, the more money they stand to lose if they walk away.

You forgot about people that did cash out refinancing, HELOC, etc. Just because you put 20% down doesn't mean you didn't borrow that later. And plenty of people that put 10% down (say in 2000) didn't "pull equity" out.

There are really only 2 reasons to default:
1) You can't make payments because of job loss etc.
2) Making payments instead of giving your collateral back the the lender no longer make financial sense.

So based on #2, of course more people default that have negative equity.

RayAmerica says

the fact that conventional loans were offering zero down, interest only, liar loans (no documentation), etc.

You better check your facts, Ray. These are the kind of loans offered by private label brokers, and sold to investment banks. Not the kind sold to GSEs (conventional).

Freddie bundled a lot of MarkInSF says

You better check your facts, Ray. These are the kind of loans offered by private label brokers, and sold to investment banks. Not the kind sold to GSEs (conventional).

Try checking your facts first. Both Fannie & Freddie were doing Alt-A loans.

http://www.reuters.com/article/idUSN1524793720070815

The only point I was making in my post was that a borrower is less likely to default if they have more down payment (I should have added AND maintain their equity position) than those that have zero down. That was the premise of the original thread. As far as people later taking equity out via cash out refinancing, you are correct that cash outs contributed a great deal to foreclosures, as did 2nd. mortgages. But, a borrower that brings 20% to the closing table represents (not always) a more fiscally responsible person, due to the sacrifice it took to save the 20% making them less likely to default. That is precisely how lenders and underwriters view it and why they typically require PMI if the borrower has less than 20%. Most of the cash outs were done by people that gained equity via abnormal appreciation. The fact they didn't do anything to earn it made them feel it was "free and easy money" and were easy prey for loan officers to talk them into removing their "sleeping" equity out of their home.

Dunno. Weren't FNM and FRE in the regulatory penalty box for the big bubble?

"As of June [2007], Fannie Mae held $722 billion in its mortgage portfolio. A 10% increase would have allowed the company to hold close to $800 billion. Fannie Mae's portfolio peaked in size in October 2004, when it held $913 billion."

http://www.marketwatch.com/story/us-agency-rejects-fannie-maes-request-for-larger-loan-portfolio-2007810174500

Troy .... as of 2007, Fannie & Freddie held or guaranteed over $5 Trillion in home mortgages which amounted to one half of all mortgages in the USA.

http://www.msnbc.msn.com/id/26578804

yes, FNM's been around since 1938 and FRM since 1970. The question isn't the size of their portfolio but its composition and how much of their lending was "zero down".

Subprime is orthogonal to this, zero-down & low-doc is "Alt-A":

"For its part, Fannie had roughly $307 billion in Alt-A mortgages remaining on its books (UPB) at the end of the second quarter, or 11.5 percent of the GSE's entire mortgage book."

http://www.housingwire.com/2008/08/08/fannie-maes-alt-a-pain-may-extend-to-bofa

This question is leading and not well thought out.

If you purchased in 2004-2007 almost anywhere in California WITH 20% down you would still be underwater. You should be asking "When did the owner purchase?" NOT "How much did they put down?" It's a matter of poor timing AND our wonderful financial system/guvment. Read "Bailout Nation" if you want to understand this more.

Also (from my experience) when times got tough with a sickness, job loss, new boat :o) people will take out a HELOC. So, it's asinine to think people will foreclose with a single mortgage.

This study did a pretty good break down covering default versus down payment (or rather, percent underwater). Unsurprisingly, the less skin people have in the game, the more likely they walk away.

http://www.realestatechannel.com/us-markets/residential-real-estate-1/real-estate-news-strategic-defaults-real-estate-bubble-morgan-stanley-loan-default-rates-home-foreclosures-bank-reo-sales-keith-jurow-wikipedia-housing-bubble-liar-loans-3258.php

RayAmerica says

There is no doubt that borrowers with less “skin” (down payment) will have a much higher percentage of defaults than those with more. Back in ancient times, U.S. banks required 20% down. FHA (i.e. government insured loan) that pretty much changed everything by offering 2.75% (been recently upped to 3.5%) down loans along with liberalized qualifying ratios and underwriting practices that led to more homeowners. [...]

Ray, keep this train of thought going and help me answer a nagging question: if you were in my shoes and were ready to purchase a new home in the next 6-8 months, would you put down more than 20%?

We're readying to buy a house, likely before I'm certain prices are at "rock bottom", but I'm struggling to understand whether it's a good or bad decision to pour more money than just minimum downpayment. That is, I can afford 40-50%, but IS IT WISE? Is there sense in pouring $$$ into an asset that's possibly going to drop another 5-10% in next few years?

We plan to keep house 10-15 years. Also, we're in central VA so the bubble never really hit (so RE prices haven't fallen as much as, say, AZ). I'm planning to go 15 yrs fixed, if that affects anything.

Thanks for your throughts.

f18va, I'd love to hear Ray's response too. What I guess is rates are headed to ZIRP. So, get an option. I put down 20% because they sneak in some other $1000 or so fee on you nowadays if you don't. Not just PMI but something disguised as another fee but looked like it was really just another mortgage insurance. No doubt the prices will continue to fall towards global wages; but, I'm also in the inflation camp; so, at least I sort of have an inflation hedge. My FIL told me to stay liquid but I was guaranteed ~4% if I dumped it into the mortgage. Not sure I made the right choice. Looks like the market is breaking out. Surprising me.

Guess Ray is too busy doing something. Here's what I am thinking.

f18va, Lynchburg is more like a middle of nowhere. In place like that, you're looking for a home, not for an investment. House price in small virginian cities including lynchburg has been gone up quite much, but not fallen at all. I bet homes once priced at 120K back in 2002 is still selling for 220K regardless of the presense of foreclosures in the area. Which means, there's a room for the price to fall further, and you're likey to lose the value if you buy w/o seeing it happening.

Good part is that, the fact you can buy almost any home w/ 200K, and the monthly cost of having home (i mean PITI) is $1000 to $1300/mo which is not much differ from rent. Suppose you're going to lose/earn 20% in few years, it's only 40K. And, you're going to stay there for next 10 to 15 years, so how much could the loss/earning really means to you? If inflation comes to your town, and everybody has to pay 20% more for the rent, the cost difference b/w owning and renting become even less meaningful.

You can live in the rent paying landlord and wait out for few more years, which I think is safe way. Or, you go find a good deal such as getting 200K home at 150K. It depends on what you want and capable of.

Klarek- Thanks for the excellent link! This answers many questions.

kronicade- You assumed...I had no intent to lead anyone anywhere here. Merely interested to know. Thanks to all responders of this post for your information as I 'm analyzing data.

cheers

kronicade- I do agree that your other question is also a good one.

I'm with Seaside on considering the monthly costs of having a home -- people often forget the benefits of not having to rent when looking at the long-term costs of housing. If you buy a home for $200k and 10 years later it's worth $150k, you've still come out ahead -- unless you could have rented that place for a total of less than $50k over the ten years. And not too many $200k homes are available to rent for $400 per month! Even if you've paid $10k in property taxes over the 10 years, you're probably still a winner.

BTW, American in Japan, where in Japan are you? Just curious.

東京のどこ？

Michinaga says

If you buy a home for $200k and 10 years later it’s worth $150k, you’ve still come out ahead — unless you could have rented that place for a total of less than $50k over the ten years.

You're forgetting about the opportunity cost of interest on that $200K, maintenance, and taxes.

If I had $200K to spend on a home, I could make $25K over those 10 years just parking it in very conservative Japanese 10 year government bonds.

In the US, I can park that money in a CD for 10 years right now and make $56K.

Add in an extremely conservative 0.5%/yr maintenance cost, and that's another $10K. More realistically it's $20K.

Taxes? What are they in Japan? Half a percent? 1%? That's another $10K-$20K. I'm looking at $25K tax cost for a $200K property in California over those 10 years.

So for me in California, no, what you say is way too low. Your $50K total rent to make it worthwhile is more like $150K.

@Troy Shinjuku ward.

cheers.

f18va says

Ray, keep this train of thought going and help me answer a nagging question: if you were in my shoes and were ready to purchase a new home in the next 6-8 months, would you put down more than 20%?
We’re readying to buy a house, likely before I’m certain prices are at “rock bottom”, but I’m struggling to understand whether it’s a good or bad decision to pour more money than just minimum downpayment. That is, I can afford 40-50%, but IS IT WISE? Is there sense in pouring $$$ into an asset that’s possibly going to drop another 5-10% in next few years?
We plan to keep house 10-15 years. Also, we’re in central VA so the bubble never really hit (so RE prices haven’t fallen as much as, say, AZ). I’m planning to go 15 yrs fixed, if that affects anything.
Thanks for your throughts.

Sorry for not answering your direct question sooner. I knew this would be a lengthy answer. Every time I started something else came up ...

Obviously, there are a lot of factors you need to consider. First, you need to determine the stability of your market. If it continues to trend down, I would suggest waiting until there are signs of the market stabilizing. However, if a "too good to pass up" deal comes along your way, that would change the dynamics. Personally, I believe interest rates will drop further even though they are at historical lows. Your plan to stay in the property for "10-15 years" is a good one ... longer would be better, IMO. Also, your desire for a 15 year mortgage is excellent because on a 15 as opposed to a 30 year, you immediately begin to accrue serious equity. Over the life of the loan you will save a substantial amount. Example:

$200,000 Loan Amount
Interest: 4.25
Term: 30 year fixed
Monthly payment of Principle & Interest: $983
Number of payments: 360
Total amount paid for life of loan: $354,196

On a 15 year fixed (same interest rate):
Monthly payment of P & I: $1,504
Number of payments: 180
Total amount .... $270.820
Savings of $83,375 over the life of the loan.

Obviously, the negative is in the monthly payment amount (don't forget you'll need to add your property taxes and homeowner's insurance too). You can accomplish virtually the same thing with a 30 year by simply making additional payments "applied to the principle." If you make one extra payment every year, you will reduce your term from 30 to approximately 22. It all depends on your personal situation. Some people are disciplined and can make extra payments; others aren't. Many would argue against this, regardless, IMO, the goal should be to get the home paid off ASAP. There are few things that provide more freedom than having your primary home free and clear (except of course your property tax lien). Also, IMO, get a FIXED RATE mortgage. Eventually, rates will be heading back up due to the Fed's efforts to curb inflation. You'll be locked in at a LOW rate while everyone else is paying much higher rates. Only use an ARM if you plan on moving within no more than a couple of years, and if that's the case, why would you want to buy?

As to the down payment amount, that has to be a personal decision. If you have enough to avoid paying PMI (Private Mortgage Insurance) that would be a big plus because this is getting fairly expensive (due to the amount of foreclosures). In the past, 20% down was typically required in order to avoid PMI. You'll need to check around on that. Also, make sure you get "Good Faith Estimates" in WRITING in order to compare interest rates and loan acquistion costs between lenders. Some lenders will bait you with a much lower rate than what is advertised. This is a gimmick used to lock you into a loan with either much higher costs, or, they will later inform you that more "points" (each point is 1% of the total loan amount) will be required (when the pressure is on about 45 days into the loan!) in order to get the loan to go through.

Some advice from personal experience when shopping for a home: Having purchased numerous properties in my lifetime (starting at age "21"), I can tell you the best deals are the ones that are mechanically sound, but are in need of cosmetics. I personally love ugly homes because it takes very little money and time to make them into something attractive. Paint (all surfaces; ceilings, walls & all woodwork), flooring (such as tile & carpeting), landscaping, etc. costs very little and yet adds often times a great deal to value. Most of this, with the exception of carpeting & tile (although tile easier than you might think) can be done yourself ... i.e. "sweat equity." Although I can afford to do so, I have NEVER purchased any home that did not need cosmetic work. However, you need to "count the costs" BEFORE you put in a bid on any property. I recommend making detailed notes as to what needs to be done and then pricing out the costs for the projects. Keep in mind too that not everything needs to be done immediately, so you can move in and begin work (although I've never been able to talk my wife into that one) one room at a time. MAKE SURE you make any bid on a property contingent upon a general home inspection. Hire only an inspector that is a member of the American Society of Home Inspectors (ASHI) ... a self-regulating organization.

One final note: I assume you are a first time homebuyer. I would strongly advise you to learn as much as you can now about home maintenance and the costs involved. If you've visited this site more than a couple of times, I'm sure you know that most here are not very high on home ownership. There's a lot that can be said for being a renter and not an owner. When something breaks (and it will), as a renter you call the landlord and it gets fixed. As an owner, you call yourself and pay the bills. Having said that, I can't imagine NOT owning my own home. There is a comfort factor involved that cannot be measured monetarily. Also, I'm sure you've noticed that real estate agents get a very bad rap on this site. With a "trust but verify" approach, use an agent that you trust (NOT BASED ON EMOTIONS) but based on the INFORMATION that they can provide. For example: on any home that you are interested in putting a bid on, make sure you get your agent to provide you with DETAILED property information of comparable sales, in writing, from the last 6 months, along with the AMOUNT OF TIME on the market for any currently, competing properties. A property (even in this market) that is priced to sell shouldn't take more than 90 days to sell, unless of course the area has an excess supply with few buyers, etc.

Hope this helps.

f18va says

Ray, keep this train of thought going and help me answer a nagging question: if you were in my shoes and were ready to purchase a new home in the next 6-8 months, would you put down more than 20%?
We’re readying to buy a house, likely before I’m certain prices are at “rock bottom”, but I’m struggling to understand whether it’s a good or bad decision to pour more money than just minimum downpayment. That is, I can afford 40-50%, but IS IT WISE? Is there sense in pouring $$$ into an asset that’s possibly going to drop another 5-10% in next few years?

In my opinion, if you plan to keep the house and not walk away, you want to put as much of a down payment as you can afford. A larger down payment equals a smaller loan and less debt in the long run. Weather or not the market is going to drop another 10% or even 20% over the next few years should have no bearing on how much of a down payment you put down. Your still liable for the full payoff amount when you sell the house, what difference does it make of how large your down payment was? I guess you can argumentatively say that if you put the least amount of a down payment on your house, you could "invest" the difference and get a higher rate of return for your money. The problem with that is "investing" isn't all that simple, you could very well lose some if not all of your investment. This is the main reason Mortgages were seen as a nice safe investment for decades before the bubble / crash, they are a nice stable investment that pay higher than government bond yields and is backed by tangible assets (real estate).

Read my lips, DEBT is bad, you want to keep your debt load to a minimum if at all possible.

As for a 30 year or a 15 year fixed rate mortgage, I always recommend picking the 30 year mortgage, you can always add additional amount to be applied to the principal to your payment every month to have the same exact results as a 15 year mortgage, and you still have financial flexibility if you economic situation changes (ie you get laid off) to make the lower payments.

This graph also showed clearly that people with less skin in the game are more likely to default.

AIJ, that is a nonsense graph since people with decent LTV would lose tons of money defaulting.

Troy says

AIJ, that is a nonsense graph since people with decent LTV would lose tons of money defaulting.

“Nessuna soluzione . . . nessun problema!„

what do you mean by "decent LTV"? does "decent" mean high or low?

Troy says

AIJ, that is a nonsense graph since people with decent LTV would lose tons of money defaulting.

Isn't that the point?

If you have 70% LTV, you have a cushion, and it's likely your house will sell for more than your loan value, so you would get part of your equity back if the mortgage is foreclosed. The bank is more likely to let you sell it yourself than foreclose for this reason -- they get their money without taking on the liability.

Some info. here:

http://www.doctorhousingbubble.com/mortgage-downpayment-important-longterm-health-of-mortgage-marekts-90-percent-ltv-and-higher-financially-damaging/