Gary, for many years, the only way a person could buy a home was to put 20% down. There were sound reasons for doing it that way.
1. You can count on losing 10% of the selling price of a home in closing costs. With a minimum of 20% equity in a home, the owner had a strong incentive to sell the home if they got in financial trouble, rather than let it go into foreclosure.
2. A person with the demonstrated financial ability to manage their budget in such a way as to save up the necessary down payment, was a far better credit risk.
3. A temporary downturn in housing prices still left enough of a positive loan to value ratio to guarantee the debt was fully recoverable.
I couldn't tell you exactly when or how this kind of sound fiscal policy changed. I know it had changed by the mid to late 90s, and I know it got progressively worse in the following decade, leading up to the current mess. By 2-3 years ago, a person could buy a house with less cash up front than they would need to rent an apartment. In 2005 I sold a $250K home. The buyer put up a total of $600 to close the sale.
Putting up the first and last month's rent, plus a damage deposit, on a comparable home, would have taken around five grand. At the time, first, last and deposit on a modest two bedroom apartment would have taken around two grand.
The current talk seems to be based on forming something along the lines of the RTC.
referenceforbusiness.com
The RTC was created to dispose of the assets of a slew of failed banks. While I can't tell you exactly when the 20% down standard was abandoned, I'm certain it was the policy at the time the RTC was formed. In other words, the paper they were charged with liquidating was backed by assets worth more than the outstanding loans.
That is NOT the case in the current mess. With home prices down on the order of 20% average, and another 10% lost on closing costs, the net on liquidation is on the order of 30% less than the face value of the paper.
In fact, it seems likely that the fire sale of property in the 80s led to the current crisis, at least if one assumes the change in lending policy was the result of banks needing to unload real estate to those who otherwise couldn't qualify for a loan. It seems equally likely the irresponsible lending policies accelerated in foolhardiness as more and more lending institutions found they could book paper profits from interest on fiat assets.
So, while I think your idea to turn foreclosed real estate into rent to own, low income housing, is well intended, it can't work. The reality is we're looking at expensive homes the owners couldn't afford to rent in the first place.
The problem is there is something north of $3 trillion in loans, on assets that never existed. The banks want taxpayers to pick up the tab on their losses. Perhaps it's uncharitable of me, but I'm against doing so. "Too big to fail" is a myth. Too fat and stupid to survive is the reality of the situation.
If there's any place government intervention might make sense, it would be in making funds available to the smaller, better run lending institutions, so they can fill the void left by the demise of the fat and stupid. |
