A mish-mash of mortgage news
* Standard & Poor's is going to require more protection on bonds backed by second mortgages, known by their touchy-feely name "home equity loans." Many of these seconds have been used as down payment substitutions -- the "20" or "10" portion of 80/20 and 80/10/10 home purchase financing structures. Predictably, many of these borrowers (who have little or no skin in the game, equity-wise) are defaulting. More seconds were given to subprime borrowers in recent years than in the past, too. That's called risk-layering (giving a borrower with bad credit -- risk factor 1 -- a loan that helps them buy a house with little or no money down -- risk factor 2).
* HUD (the Department of Housing and Urban Development) is going after so-called "down payment assistance" programs offered by several nonprofit groups. While these programs sound good in principle because they allow more renters to become homeowners, HUD maintains they have contributed to an increase in foreclosures. Loans with down payment help go into foreclosure twice as often as traditional FHA loans.
This story explains the way these programs work, and why they can boost foreclosures. Suffice it to say that a buyer may not need to come up with a down payment under one of these programs. But he typically ends up paying an inflated price for the house. That increases the mortgage size and required monthly payment and essentially puts him underwater from day one -- meaning, he owes more than the true value the home would fetch in an open market sale.
The nonprofit groups active in the market maintain the programs work. But regardless of who's right, the fact remains that the elimination of down payment assistance programs would have a small impact, at the margin, on housing demand. Bloomberg points out that more than 100,000 home buyers used these kinds of programs in 2006. HUD's proposal will be put out for public comment shortly, after which time interested parties will have 60 days to submit their views.
* The perennially optimistic folks at the National Association of Realtors have lowered their housing forecast ... again. The NAR now expects median home prices to drop 1% this year, down from a previous forecast of -0.7% and a forecast of +1.2% before that. Prices haven't declined on an annual basis since the group started tracking them in 1968.
* Last but not least, the debate continues in Congress about what, if anything, legislators should do to sort out the mortgage mess. Time permitting, I hope to have much more to say on this front in the coming couple of weeks.